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Is It Time to Kick Our Addiction to 30 Year Mortgages? How 15 Year Mortgages Could Save The Day

Is it time to kick our addiction to 30 year mortgages? Could it be that 30 year mortgages are harming our industry by contributing to negative equity situations faced by so many homeowners?

To answer these questions, we only need to look at the auto industry, a place where no one cares that their car is "underwater". But when your house is underwater? All hell breaks loose.

People think it is okay to just walk away from their house (and another foreclosure is on the books).
People demand a modification even if they can afford the payment and don't want to move.
People try to blame loan officers, real estate agents, and believe the whole gig is a grand conspiracy against them by the real estate industry
People demand that the government "do something"
All kinds of phony baloney "loan modification" people come out of the woodwork
Real estate agents convert to "short sale" experts
Prices spiral downwards and investors circle like vultures to buy up cheap properties
People sit on the sidelines and stew about "finding the bottom of the market" instead of buying a house that they really love.

Meanwhile, in their garage is a one year old car worth $15,000 that has a loan on it for $22,000.

I don't see ANYONE waiting for the "bottom of the market" to buy a car, or asking for a bailout because their car is worth less than the loan. And I sure don't read anything about the public being "mad" at car dealers because their car is "underwater".

Now maybe you are ready to argue with me that real estate is different because it is an appreciating asset.

Oh really? Would you please explain that to all of my appraisers? Or my underwriters who will rip to shreds any appraisal that shows a house actually went up in value?

Why are cars different? The length of the loan matches a reasonable length of time you will use the asset.

That simply is not true for the mortgage industry. How many people do you know still in the same house after 20 years? Or even 10 years?

With a car you know this: Worst case? You keep driving and pay it off. It isn't unreasonable to think you would keep the same car for 5 years. Is it a conincidence a standard car loan is for 5 years? No.

What do we do in the real estate industry? Make our loans SO LONG that it is rare to get to a point where you can say, "what the hell, in a few more years I will own this free and clear. I'm stayin' put!"

Who can see the light at the end of a 30 year tunnel?

Is it time for us as an industry to start encouraging 15 year loans? I think it is.

I agree that many people could not afford the payments, or would need to buy cheaper houses. Isn't that situation preferable to the chaos we now have in the industry?

And here are the BONUS points I am awarding to 15 year mortgages:

A 15 year mortgage would flip you into an equity position far sooner than a 30 year mortgage even if the house never appreciates.
A 15 year mortgage has a lower interest rate.
A 15 year mortgage will cost you far less in interest over the life of the loan

Yet we loan officers sit back and take this response from our clients: "15 years? No thanks. I'll take the 30 year mortgage, make bigger payments, and pay if off sooner."

Yeah, right.

Written by Janet Guilbault, Mortgage Banker/Broker based out of the San Francisco Bay Area.

Posted by Janet Guilbault California Mortgage Banker/Broker on 08/25/2009 09:57 AM

Comments (26)

30 Year Mortgage vs 15 Year Mortgage in the Mortgage / Finance Channel

mortgage crisis, 30 year mortgage vs 15 year mortgage, negative equity, buyers, real estate loan

Originally posted at: Buying Real Estate in California? Everything You Need to Know to GET APPROVED NOW: Is It Time to Kick Our Addiction to 30 Year Mortgages? How 15 Year Mortgages Could Save The Day

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26 Comments on Is It Time to Kick Our Addiction to 30 Year Mortgages? How 15 Year Mortgages Could Save The Day

AUG

Janet: great thinking, great writing, great post - I glad you made it possible to reblog this because I will. Be well, Janice Roosevelt

I couldn't agree with you more. I'm not sure what happend to fiscal responsibility in this country, but it is gone. Now everyone sits with their hand out wanting someone to "bail them out".

Kids are getting brand new cars on their 16th birthday, gone are the days when you start out small and work your way up?

Our country is quickly losing respect from the rest of the world...and we bury our head in the sand hoping someone will come along and save us!

We need more intelligence and responsibility.

Janet,

First of all I must say I love the signature on the bottom of your post, very posh.

I totally agree and cannot understand why people take out a 30 year mortgage when they know that they are not going to be staying there forever.

Good Post!

Sharon

Janice: You know I have a left brain and a right brain.

One side is about the auto business and one side is about the real estate business. Some mornings I wake up and the 2 sides are talking to each other. LOL and have a great day.

Thanks for the reblog.

Sharon, when I bought my house the real estate agent was buying a house in my same neighborhood. He told me he was going with a 15 year loan, and when his kids got into college he would be mortgage free.

I have thought of him many times and wished I would have done the same thing. He is still selling real estate and one of the top agents around!

Angie:

What worries you, also worries me. I still cannot believe the number of people I know who feel it is acceptable to walk away from their home loan.

Seems like it is the "in" thing to do.

Scary.

I am so glad you brought this up. I have had the observation for many years that most borrower's are unaware or only vaguely aware that they can obtain a lesser loan term than 30 years. We, in the real estate industry have always talked in terms of the 30 year loan. If we change that tune to consumer choice of term and not a one term fits all - much of what you proposed would be very possible. I think the education of "choice" needs to originate from the real estate industry - what a wonderful opportunity we could have in re-educating the public on how they can reclaim ownership and control of their properties. What a concept.... You might be on to something.

On more thing...

"Yet we loan officers sit back and take this response from our clients: "15 years? No thanks. I'll take the 30 year mortgage, make bigger payments, and pay if off sooner."

This is exactly where we start.... explaining and showing the consumer that there may be far more value and benefit in an early payoff - it's not about the payment, it's about balancing the payment PLUS having control in their life. The industry and buyers have marched along in unison on the 30 year loan. What about a 25, 20, 15. The consumer has no idea they can obtain these timelines.

Cathy: I think the short term thinking of "what's the payment" seems to trump long term thinking each and every time.

Plus, many loan officers buy into this short term mentality...

But what I am trying to do is something on a much grander scale. I would like to suggest that a gradual change over to 15 year mortgages would make our entire industry much more immune to the disaster we currently find ourselved in.

With home prices coming down, it makes a 15 year more affordable. Talking about paying off a mortgage is more common - maybe not specifically on the current house that is underwater but in general, it is an emerging topic in conversations.

Also I think the average home buyer is becoming more in tune with buying what is affordable.

Paying so much attention to short-term has been a tough lesson for America. Time for a new trend to 15 year mortgages? It would be good. Kate

Janet - Wonderful post. I do show shorter term loan comparisons to my customers; however our society seems programmed to get as much as we can right now for the least amount of money. We have become an on-demand culture that does not think about the future. Your idea is especially significant in this time of declining values. Hopefully we can educate our clients and help to spread the word.

Kate: You make some great points. Just having so many cash buyers in the market right now makes me think owning properties free and clear might be the wave of the future.

This brave new world of low prices is opening up all kinds options that did not exist before.

If ONLY....people would qualify themselves based on a 15 year mortgage....buy the lesser house, and plan on many years of no mortgage payment.

Hard to be long term focused. They don't teach that anywhere or promote it. Its all about payment.

We used to say this in the car business: try to match your loan (or lease) term to the amount of time you REALLY think you will want to drive the car.

That is a true foolproof way to never have to suffer from negative equity.

Did it always work? NO, mainly because of the option to drive a better car for the same LONGER payment term.

3 years later they were back, in a negative equity situation, and were miserable.

That's where I learned my lessons about negative equity.

Well Janet, this is beside the point but I think we are to be congratulated for re-engineering our thinking and not hanging onto how we did it in the past. Because as you say, it is a brave new world and we want to make sure the dream of homeownership continues in America. Kate

We long term "see the forest and not the trees" kind of people (and Kate, I think you and I are those kind of people) don't get a lot of play. LOL

I see your point, but would put a twist on it. First, IF people bought cheaper homes sure a 15-year wouldn't strap them monthly like it would now. The fact is a 30-year is afforable. If everyone waited around for financing options to be affordable for a 15-year mortgage, our markets would sink much lower than they are now.

What we can all do now is advise financial literacy, advising clients how they can use a 30-year loan, and set aside assets to pay it off in 15 years or less. This creates a FAR safer environment for home owners in case they get into a bind, lose a job, have a pay cut, etc. But the bigger issue is our nation's overall dependancy on debt. People feel debt is and always will be a part of their life. Our job is to focus on one person at a time.

If everyone waited around for financing options to be affordable for a 15-year mortgage, our markets would sink much lower than they are now.

Fair statement, it would be like tough love. But houses are already alot cheaper than they were before. Maybe this is a good place to start?

use a 30-year loan, and set aside assets to pay it off in 15 years or less.

I agree with you that this is the ideal. But it is not reality. Reality is most people are not going to set aside assets to pay it off in 15 years or less.

AUG

Janet,

I had to come back to this - I hope you don't mind.

I am curious, why does our industry primarily promote the 30 or l5? Why not a 20 or 25? A variety of choices might encourage more participation and wean borrowers away from the 30. The "tough love" of l5 might keep them stuck on 30 - this is something we would want them to go to willingly for their OWN benefit. Just my own observations.

Janet, this is a very conservative stance and one that over time would make our housing industry mush sounder. But, the affordability issue may hurt values in the shorter term. A 15 year amortization for all who can afford it is a great idea for financial soundness.

How about seller financing to eliminate banks altogether?

This idea is ideal only for those: 1. Who have no self discipline whatsoever. 2. Those who can afford to pay on a 15 yet, take a 30 and spend at Nordstroms. 3. Those that just cannot WAIT to get rid of their largest tax deduction twice as fast! (Author must not understand that tax rates are on the rise and that the mortgage deduction is almost like having a second job when considering the tax benefits if deductible interest payments.) 4. Those who do not understand the power of leverage in conjunction to being irresponsible. Do you think that someone who believes in leverage would EVER subscribe to such an idea? Talk about investment kill 101! 5. Those of us that want to put retirement savings on hold for 15 years! 6. Those of us who do not need cash reserves for emergency situations. 7. Those of us who believe in Suze Orman. ... And the list goes on! Your plan is just not realistic, especially for people who are responsible, disciplined, intelligent, and understand the power of leverage and tax deductions. Those who decide to introduce such extreme ideas should use a ton of asterics and they should look something like this: * This plan was devised for those of you who have zero spending discipline, no financial planner, a below average IQ, no clue about the velocity of money, who want more zero return equity and less savings, who see no need in sending your kids to college, who want to be in a higher tax bracket, blamers, and those who may be better off renting. For those of us who live in Southern California, let's not forget what this would do to our beach city home values. Oh well, we had a good run! Baby steps author, baby steps. The answer to the question you are asking is tougher underswriting, not the elimination of programs and freedom. This has already happened and will work nicely if you would just be patient and stop jumping the gun quite so often. Kudos though, what a great idea for 1925!

It's interesting but I don't see it as wholly feasible.

Take a $150,000 mortgage at 30 years at 5.5% vs $150,000 for 15 years at 5%, taxes and insurance equal $400 per month.

The 30 yr mortgage has a PITI of $1251 at 28% front end ratio your income needs to be $53,614 per year.

The 15 yr mortgage has a PITI of $1586 at 28% front end ratio your income needs to be $67,968, or 26% higher to qualify for the higher payment.

If you overcome that hurdle, you can certainly build your equity faster. After 5 yrs in each mortgage you've paid in $11,309 with the 30yr vs. $38,164 with the 15yr. That will save you a lot of interest over time, no question about that.

The question comes as always, is this the best use of money. Take the young couple purchasing a home for the first time. Over that same 5 yrs would they be better off putting an extra $335 into their house or into a bank account or investment account. Such as an emergency account, retirement account, college funds for kids and kids yet to be. Over the same 5 yrs, $335 invested at 3% would equal $22,045. In the bank it's a lot easier to get to in an emergency, than if it were in your house. Mortgage money is still the cheapest money you can borrow, the interest is still one of the few tax deductions the average person has, and you're forgetting about the effects of inflation on a fixed payment 10, 20 or 30 years from now (should they actually stay in the house that long), when you filter in inflation that payment might look pretty small down the road.

Better to make a few extra payments towards the principal when you feel you can afford to do so. This will shorten the term of the loan but afford you the flexibility that the extra cash gives you.

Just my thoughts.

I totally agree with encouraging our clients to obtain a 15 year loan. I see more people asking about them as they approach refinancing than I have in the past 13 years. Just in the last 6 months, I memorized a loan scenario, and I use it as part of my pre-qual appointments. I use the following loan example: $87,000 for a 30 year term @ 6.25% vs. a 15 year term @ 6.25%. I keep it simple to avoid confusion, even though the rate would be less on the 15 year term. Then I tell them that after 5 years the balance on the 30 year would go down $5000 vs. $20,000 on the 15 year term.

Most people are amazed by this because even though the "word on the street" is that the 15 year builds equity faster, they really don't know how much faster. It's our job to inform the customers so they can make an educated decision. My guess is that most people just hear that rates have dropped because a family member or friend told them. And if that same family member or friend got another 30 year loan, that's what they want to do also.

I believe the credit crisis began due to #1-Lack of time and #2-Lack of self-discipline. Nobody has (or makes) the time to do the research and find out the best scenario for their family & their future. People are also more worried about what kind of house, car, clothes, etc. their neighbors and friends have than their future financial situation. They would rather "save" the extra $180 and get a 30 year term AND a bigger house or new car than opt for the 15 year term and keep driving their old car or a smaller house.

I used to love my job because I felt like I was helping people with the biggest decision of their life, and I felt appreciated. Lately, it seems like folks are less and less appreciative of the information they receive and have more of a sense of entitlement-especially first time buyers.

Anyone else feel this way?

I totally agree with this and think also that the amortization schedules can be adjusted so that the loan isn't so front loaded with so much interest. The more equity someone can build-the better for everyone (except the lender won't make quite as much interest in the first few years!)

The interest isn't "front loaded" like the management fees on mutual funds. The interest is based upon the principal balance times 1/12 the rate of interest. The principal portion is calculated to retire the loan in the term provided. You can play with the principal portion which will in turn affect the balance upon which the interest is charged.

That you pay more interest in the beginning years is a function of math, not front loading.

No offense but I think that's a pretty narrow minded view. For starters yes we may be in a recession and values are in a slump right now. Can you tell me the last time we've seen depreciation in the housing market? It's pretty easy to look back and see that real estate values double every 10 years. It's been going on for ages! The problem in, and this is apparent in your post, that people think whatever is happening currently is going to continue to happen forever. The truth is the market is up more than it's down. We just happen to be in a pretty big down. And you can't seem to see through the down turn.

Honestly 15 year mortgages are the most costly mortgages to get. Not on the surface but in the long run. I'm not going to get into why but if you check out a book entitled Stop Sitting On Your Assets by Marion Snow you'll see why.

I will agree with you that homeowners want to blame everyone else when in fact the biggest culprits are themselves. They got into loans they knew they couldn't make the payments on simply because the banks would give it to them. LOs and Realtors didn't help by making things so available but still the borrowers should have been able to say no when they saw the payments are more than they could afford.

I could go on but I'll stop before it gets out of hand. LOL!

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