THE TIME OF THE 30 YEAR FIXED MORTGAGE MUST END
It was a good run, it provided a roof over many heads and has served us well since the time of the great depression. Like a once great sports star though, it has hung around past its prime and gotten caught in a few scandals. The 30 Year Mortgage is past its prime now, once great but ready for retirement and someone should make sure its camera phone is disabled. There are 2 main philosophies regarding mortgages and personal finance, and neither supports a 30 year loan. On one hand we have the "Cash is King" lot, who lease, rent and pay as little as possible for living expenses today in order to either live a higher quality of life or they stash as much cash as possible into their brokerage account hoping that their portfolio out earns the interest paid on other debt. On the other hand we have the "Mortgage Burners" who throw parties when their mortgage notes are returned to them as settled and their homes are free and clear. Let's look at both theories and you can decide which is for you.
CASH IS KING
This philosophy opts to increase cash flow by paying as little now for debts as possible. Interest on a mortgage is tax deductible and this makes home owners actually less expensive than renting. This group decided early on that they would probably never ever own their home free and clear, when they retire they will obtain a reverse loan if possible and use their assets to enjoy life. Interest only mortgages, ARMs and Negative Amortization loans were the norm for this crowd. These may seem like risky loans and many blamed these loan products for the market collapse, but the loan products themselves are perfectly fine and can all be used in a fiscally responsible manner. Believe it or not, the majority of the world still uses something other than the Fixed Rate mortgage to buy a home. In fact, many banks and investors believe that it's absolutely ridiculous to try and gauge a long term loan's risk factors based on a snap shot of someones credit and 30 days of pay stubs. How will that qualifying income and credit be able to judge credit risk 5, 10 and 29 years down the road? The credit report itself only has a 7 year history and a lot can happen in any 7 year span. Think about the last 7 years for yourself... has your life changed by a birth, death, divorce, medical issue or employment change? Are you even in the same home you were 7 years ago? Many countries have roll over loans where your situation is reassessed at standard intervals like 5 or 7 years, which sounds a lot like our standard hybrid 5 or 7 year ARM in the U.S. The rates are often lower for these shorter periods and lower housing bills would mean either a higher quality of life or more savings, both are good things in my opinion. Read the "4-Hour Work Week" to see this philosophy in action.
BURN THE MORTGAGE
On the flip side we have the group that recommends paying off your home as soon as possible. Forget the 30 year mortgage, if you can't pay your loan off in 15 years you can't afford the home. There is absolutely no reason to take 30 years to pay off a loan. At today's interest rates a $250,000 loan would cost you $456,000 over 30 years and only $321,500 with a 15 year loan. That's a savings of over $130,000 on your home and for many people that's more than an entire years worth of household income. Think about that, you could be choosing to work an entire year to pay additional interest to the bank. The trade off is a little less than $500 more per month, these experts say that if you can't afford the extra $495 per month, then you should look at a slightly less expensive home. The amount of principal reduction in 5 years will amaze you on these loans. With $495 more per month you will have also paid $15,000 less in interest and will have $45,000 more in equity than your 30 Year Mortgage counterpart, basically pay $500 more per month and gain equity at a rate $750 more per month than the 30 year option. Not a bad trade off. Read the "Automatic Millionaire, Homeowner" to get more on this philosophy.
CHOOSE YOUR OWN ADVENTURE
So why is there a 30 year mortgage in the first place? Other countries have high ownership with Hybrid Loans as the norm. If the 30 year mortgage suddenly disappeared tomorrow I'm fairly certain that homes would still get sold and families would still be housed. I suggest that we amnesty anyone with a 30 year loan now, Fannie Mae, Freddie Mac, FHA, VA and USDA should allow 30 year loans for a limited amount of time and HARP 3.0 should allow anyone with a current 30 year loan to refinance it one more time at low rates. After this round, the risk to a lender to lock in a rate for such a long amount of time, with no review periods, should be passed onto the borrower. If you want a 30 year fixed rate, that luxury will cost you. The U.S. could convert to primarily Hybrid loans and 15 year fixed originations within a 5 year time frame. We could wean down to 10 year Hybrid ARMs and 20 year Fixed Rates in a few years time and make the transition a little easier. Whether you believe in the "Cash is King" or the "Mortgage Burning" personal finance philosophy I'm asking you to fully commit to driving a nail into the coffin of the 30 Year Mortgage and either refinance into the mortgage of your choice or purchase a home with an option in mind. Don't get the "30 Year Fixed" rates just because they are posted on the website and your uncle's fiances' former roommate locked into a pretty good rate she'll be marginally happy with in 4 years, refinanced out of in 10 years and forgotten in 12 years.
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