Could Rising Mortgage Rates Push Borrowers Into Longer-Term Loans?

One Federal Reserve official believes 40-year mortgages could be a good idea.

While 2021 saw record low mortgage rates, 2022 has been the year of rising interest costs on home loans. Rates are up considerably since the start of the year, which makes home loans less affordable. These higher rates could potentially push borrowers into choosing longer loan repayment terms, which means more borrowing costs over time.

Data source: The Ascent's national mortgage interest rate tracking.

30-year mortgage rates

The average 30-year mortgage rate today is 4.860%. This rate is much higher than the 3.369% average mortgage rate borrowers saw on Jan. 3, 2022.

20-year mortgage rates

The average 20-year mortgage rate today is 4.549%, compared with 3.101% on Jan. 3 of 2022.

15-year mortgage rates

The average 15-year mortgage rate today is 3.963%, which is a substantial increase from the 2.537% average rate on Jan. 3.

5/1 ARMs

The average 5/1 ARM rate is 3.846%. On Jan. 3, 2022, this rate was just 2.943%.

Longer loan terms could make payments more affordable as rates rise -- but they may not be a good idea

When mortgage rates rise, monthly payments are pushed higher. This can make it more difficult for borrowers to afford their homes. In some cases, borrowers may choose loans with longer payoff times rather than shorter ones. While this raises total costs, it makes each monthly payment more affordable.

Typically, 30-year loan terms are the longest available. However, the Philadelphia Federal Reserve Chairman has recently discussed the benefits of 40-year loans for some borrowers, as adding a decade of repayment time could cut monthly costs substantially.

Unfortunately, stretching out repayment for so long could mean paying considerably more interest over time. It could also result in borrowers paying off their loan principal so slowly that they end up owing more than their home is worth. And it could mean borrowers carry more mortgage debt into retirement.

Would-be homeowners should be cautious about opting for long repayment timelines and should shop around with the best mortgage lenders to find affordable loans that can be paid off in 30 years or less.