Will the 30 Year Mortgage Go the Way of the Dodo Bird?

Search for “end of the 30 year mortgage” on Google and you’ll get 12 million plus results. Apparently it’s in vogue to predict the demise of this bastion of homeownership in the US and much of it stems from the fact that Fannie Mae and Freddie Mac have stiffed taxpayers for over $134 billion … so far. Common sense certainly seems to have become extinct.

Those two mortgage … um, companies (?) … are they really even companies? …whatever, those two entities are the prime purchasers and re-packagers of 30 year mortgages and they are understandably on the Congressional chopping block. In testimony before Congress a few weeks ago, Treasury Secretary Tim Geithner admitted that reducing the government’s exposure in mortgage markets would almost cause them to dry up or at least severely constrict their availability to consumers. Those that remained available would have much higher costs which would also be passed along to consumers. The question becomes: what would that cost actually be?

At any rate, what you and I think of as a “traditional” mortgage today will probably not be what our children or grandchildren think of as “traditional.” A 10 or 15 year mortgage is probably what they will think of as normal.

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What does the death of the 30 year mortgage mean?

  • Fewer people will be able to afford their own home, except possibly through creative financing, owner financing, or adjustable rate mortgages (if they’re still around).
  • The middle class could be temporarily priced out of home ownership.
  • Homes will become smaller.
  • Homes will have to eventually become cheaper as the inability to buy them drives prices down.
  • Municipalities and school districts will have to make do with smaller budgets from reduced millage unless property taxes are drastically raised.
  • The economic health of multiple industries would suffer in both the long term and the short term. Think of construction, building materials companies, logging, interior design, cabinet companies, flooring companies, the list goes on and on.

At today’s rates, a homeowner who qualifies for a $300,000 mortgage will only be able to qualify for a $200,000 mortgage if 30 year mortgages become unavailable or too expensive.

With fewer customers able to afford the larger homes, smaller homes will become the norm. In the short-term, the demand for those smaller houses could drive their price up as well, only exacerbating the problem until builders can construct enough smaller homes to drive the price back down.

If you’re looking to buy a home anytime soon, the availability of the 30 year mortgage may play a factor.

Can you afford the home you want with a 10 or 15 year loan instead?


Photo courtesy of Wikimedia Commons

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