Sunday, March 6, 2011

The End of 30 Year Mortgages?

Here in the United States, 30 year fixed rate mortgages have been the only realistic means to home ownership for the middle class. They first began in the 1930s when the government stepped in to help stabilize the housing market during The Great Depression. B-flat, garden variety, 30 year fixed rate mortgages, taken out by responsible home buyers and written by honorable lenders, were not the cause of the contemporary mortgage crisis. Those responsible homeowners were, however, part of the collateral damage in as much as the values of their homes declined sharply. Now it seems as if all the responsible home buyers who wish to sell and buy a new home or get into the market for the first time, are about to get screwed out of the option of a 30 year fixed rate mortgage.

In a housing utopia we could all save for a few years and buy a home for cash - I said utopia! In an ideal world we could all afford a 15 year fixed rate mortgage. But with income stagnant and the buying power of the dollar diminished, the significantly lower monthly payment of the 30 year fixed rate mortgage is key to the equation. (For a $250,000 house, with 10% down, at a 5% interest rate, the monthly payment for a 30 year fixed is $1,208; for a 15 year fixed it’s $1,779 - a $571 difference.) But with the impending demise of the elder Fannie Mae and the younger Freddie Mac, 30 year mortgages could disappear and so too the dreams of home ownership for the middle class.

Paul McMorrow explains the problem in the Boston Globe and Binyamin Appelbaum explores it further in the New York Times.

Without a 30 year fixed from the Bailey Building and Loan Association, Mr. Martini and his family would not have been moving into their own home in Bailey Park. And George and Mary Bailey wouldn’t have been toasting them with “Bread: that this house may never know hunger; Salt: that life may always have flavor; Wine: that joy and prosperity may reign forever”. That was all from “It’s A Wonderful Life ”, but isn’t that exactly what we all want?


Ms Brown Mouse said...

Both our mortgages were for 25 years, but I get what your're saying. Without reliable loans from dependable lenders only the very wealthy and their children will be owning homes.

Roo said...

We have a lifetime tracker mortgage, which tracks the Bank Of England base rate, with a 1% point above it. However we are lucky (in as much as we can be at the moment) as while interest rates are so low, we are paying the same amount each month, and paying the mortgage off quicker.

My sister Angie has just paid hers off, and good for her! ;o)

cynthia said...

I just had to swing over and say Thank you for the sweet encouragement of Not Smoking on Cathy's Blog:) Another day without it:)

Sue said...

Our standard bond term is 20 years over here. I had to google it to see what our current prime lending rate is - 9%, which is pretty low for us, it's been up to 18% not too long ago. We can go up to a 30 year bond without much hassle, but it doesn't make too much difference in the monthly repayments. Personally, I'd like to have my bond paid off as soon as possible!!

Pink Granite said...

Hi DMM -
While others are available, around here the standards are 15 or 30 year; adjustable rate or fixed rate. The best rates are usually attainable if you put at least 20% down. So on the $250,000 house scenario that would be $50,000 up front! It doesn't take much arithmetic to see that home ownership is already a stretch for the middle class.

Hi Roo -
Your Lifetime Tracker took a bit of Googling but for an adjustable rate it seems like a more consumer friendly package than some of what we have over here.
The best part is that you and Peter are paying yours off faster and that Angie is home free! Hurray!

Hi Cynthia -
Yay & Hurray!!!
Hang in there and keep adding another day and another and another!
You deserve all the benefits of being smoke free!

Hi Sue -
Our rates were up around 9% back in 1994 and again around 2000. I think everyone wants to have their mortgage paid off as soon as possible. But as you can see from the example I gave, an increase of more than 30% to go with a 15 year can be prohibitive.

One important note is that it's vital to have a mortgage written with no pre-payment penalty. That way if your income goes up, you can put additional money toward the principal every month, thereby accelerating the pay off.