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Will the 30 Year Mortgage Disappear?

The federal government is reconsidering their involvement in the home mortgage process. They plan to still ‘guarantee’ certain mortgages. However, they appear to be redefining what they consider a ‘qualified purchaser’. They are discussing stricter lending guidelines in four different areas:

  1. The type of mortgage
  2. The minimum down payment
  3. The debt ratios of the buyer
  4. The FICO score of the purchaser

Today, we want to look at #1.

It appears that there is at least conversation about eliminating the 30 year fixed rate mortgage which has been a staple in this country’s housing industry for some time. Some in government want to duplicate the mortgage process of other countries. In Canada, for example, they don’t even have 30 year fix rate mortgages available. The vast majority of Canadian home loans have a 25 year payout but the interest rate is renegotiated every five years. If rates go down, you will wind up with a lower rate. If rates go up, you end up paying a higher rate. If you want a fixed rate mortgage for 25 years you pay a rate approximately two percentage points higher than the going rate at the time of your closing.

Would the same happen in this country? Last week, Housing Wire quoted Janis Bowdler, senior policy analyst at the National Council of La Raza:

“Without some form of Fannie Mae and Freddie Mac, replacements to support these popular loans, many first time borrowers will be shut out.

“Without that guarantee lenders would not offer 30-year fixed-rate mortgages, at least not at rates the average person could afford. Yes, some would be available but not for the average family but for those with a large amount of inherited wealth they can put to a large down payment.”

Why Is This Important?

You probably want to set your housing expense at the lowest number possible for the longest time possible. This may be the appropriate time to lock-in your long term housing expense as three things seem possible, if not likely, in the future:

  • Mortgage rates will increase from current historic lows
  • The 30 year fixed rate mortgage may disappear
  • Rents will return to historic norms of 3% annual increases

Bottom Line

If you want to purchase a home of your own but are waiting to see where prices will go, consider what you could be giving up while you wait.


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9 replies
  1. Ron Jesser
    Ron Jesser says:

    Not sure if I like a 5 year adjustable 25 year term mortgage. Imagine trying to sell that to buyers in the US? They will qualify for less home, down payments wil be higher and fear of their payment rising will be hard to explain away unless there are safeguards built in.

    Reply
  2. Matthew Ferrara
    Matthew Ferrara says:

    Steve:
    Great article as always. However, I’m not sure getting rid of the 30 year fixed is actually a bad idea; for example, if my fixed rate had automatically renegotiated this year (year 6 of my loan) I’d have dropped from my 6% to maybe 4% and SAVED a lot of money – which I can’t do right now because banks aren’t “interested” in refinancing someone who’s still paying his bills on a higher loan he’s locked into…

    We should also consider the overall financial industry stability of re-evaluating debt every 5 years, rather than on a longer horizon. Sometimes long-term debt stability makes great sense for banks; other times it is bad for the banks – which means worse for borrowers.

    Lastly, I’d like to submit that there’s VERY LITTLE risk of interest rates rising over the next decade for a reason BIGGER than housing: The Federal DEBT. If interest rates rise, the cost to service the debt will SOAR. So the Feds are likely to be pushing rates down artificially for years, if not a decade. Long enough for us to see how alternate financial models can work for housing.

    So, I’m not too worried; in fact, I’d like to see the financial model in housing really shook up – because what worked in the 1960-1990 model years are clearly not working for the new millennium!

    Reply
  3. Chris
    Chris says:

    I despise the housing industry, the big banks, and the full of crap realtors that continue to blow sunshine up everyones bung holes. Buying property is a fools game these days. If you want to beat the system, you have to buy property outright. Loans are for suckas!

    Reply
  4. Steve Harney
    Steve Harney says:

    All we are saying is today a consumer can lock in their housing expense for the next 30 years @ 4%. The only financial reason NOT to do this would be a belief that interest rates will DECREASE DRAMATICALLY in the future. We don’t know anyone making that prediction.

    Reply

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