It’s no secret that the 30-year fixed was the best deal ever a few short years ago.
Back in 2021 (and in surrounding years) you could lock-in a sub-3% mortgage rate for a full 30 years.
Yes, you could get an interest rate of say 2.75% for the next three decades, with no worry of the rate adjusting higher. EVER.
In retrospect, it’s pretty bonkers that we weren’t falling over one another to go get one.
Sure, lending volume during those years was sky-high, but sometimes I’m surprised it wasn’t even higher.
But now that the 30-year fixed is no longer on sale, why do borrowers keep opting for one over other options?
30-Year Fixed Mortgage Rates Are Decidedly Average
Using Freddie Mac data going back to 1972, the 30-year fixed has averaged roughly 7.75%.
That number takes into account those super-high mortgage rates in the 1980s, when the 30-year ascended to nearly 20%.
And the super-low mortgage rates seen over much of the past decade, when the 30-year fixed hit an all-time record low 2.65% in January 2021.
So it appears we are right smack dab in the middle again. Mortgage rates aren’t a terrible deal today, but they’re no longer a bargain either.
They’re simply hovering near their long-term average, which goes back more than 50 years now.
The problem is that the typical American is/was used to seeing a mortgage rate that started with a 2 or 3, and now a rate that starts with a 7 is incomprehensible.
People just can’t wrap their heads around it. How could this be normal? How is the housing market supposed to operate with rates this high?
Well, when you zoom out and realize they aren’t really that high, you might start looking at other things, like asking prices.
I’ve argued before that “high mortgage rates” are a good distraction for other issues, like high prices.
We can argue about whether prices are high until the cows come home, but it’s clear affordability is historically poor.
And something will likely need to give as unaffordable levels like this don’t tend to persist.
Perhaps 2025 will be a battle of sorts between sellers and buyers to determine the path for home prices.
But until more inventory comes online, expect prices to remain elevated. This will vary by market, with metros with more listings seeing more downward price pressure. And vice versa.
How Long Are Today’s Mortgages Actually Going to Last?
Now back to that 30-year fixed being not much of a deal. If a ~7% 30-year fixed is the going average today, why not choose a different type of home loan instead?
Why do we continue to originate 30-year fixed loans if they aren’t a great value? Or if the borrower is expected to refinance out of it long before it matures?
If you ask your typical home buyer today how long they plan to hold their mortgage, they’ll likely say a few years. Maybe five at most?
I doubt very many of them expect to keep the loan for anywhere close to 30 years, or even 15 years for that matter.
Even keeping the loan for a decade seems unlikely. Is it possible? Sure, anything is possible.
But is it probable? I’d argue no. I expect most of these home buyers to arrange for new loans before that, likely because mortgage rates will drop at some point.
This doesn’t mean the 30-year fixed will fall back to 2-4%, but even if it drops to 6%, or somewhere in the 5s, you can bet those 7% mortgages will be ditched in a hurry.
The problem is that the 30-year fixed continues to be the default option offered by just about every bank, lender, and mortgage broker in town.
Maybe this needs to change.
It’s Hard to Find a 30-Year Fixed Alternative These Days
It made sense that the 30-year fixed commanded a massive share of the mortgage market for the past decade and change.
As noted, they were a screaming deal and there was little point to opt for an alternative, such as an adjustable-rate mortgage.
The only caveat was the ultra-wealthy who could get an ARM set at 1% because of a sweetheart relationship.
For most, a 30-year fixed that started with a 2 or 3 was a no-brainer. Today, not so much.
A 30-year fixed that starts with a 7 should no longer be the default option. Yet it is because lenders often don’t have any other alternatives worth exploring.
Even if they do offer an adjustable-rate mortgage, the rate discount is typically negligible at best.
This is because there isn’t a secondary market for ARMs. Nobody is buying them, so lenders, especially nonbank lenders, don’t offer them. And even if they do, the rate isn’t worth the risk.
The one exception is credit unions and some depository banks, which both hold onto the loans they originate. As opposed to selling them off shortly after origination.
This is where you can actually find deals on ARMs. For example, I looked up local credit unions in Los Angeles this morning and found rates that are a full one percent lower on 5/6 ARMs vs. a 30-year fixed.
So a rate of 5.875% vs. a rate of 6.875%. Of course, there is risk associated with an ARM, but these loans are still fixed for 60 months before becoming adjustable.
At any time during those 60 months, the mortgagor could sell the property or refinance the loan.
They could also choose a longer ARM, such as a 7/6 ARM, which provides 84 months of fixed rate security before its first adjustment.
The point here is there are 30-year fixed alternatives out there, and now that the 30-year fixed isn’t a deal, maybe we should be exploring them, responsibly.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
