A staple of the housing industry for the last 60 years has been the 30-year fixed rate mortgage. The 30-year mortgage came about in the 1950’s to combat the sudden rise in interest rates
30 year fixed rate mortgage
A staple of the housing industry for the last 60 years has been the 30-year fixed rate mortgage.
The 30-year mortgage came about in the 1950’s to combat the sudden rise in interest rates after the Federal Reserve changed its policy of buying treasury debt in order to artificially keep interest rates low.
At the time 20-year mortgages were the standard. The effect of going to a 30-year mortgage was that after a 2 percent rise in interest rates the payment stayed about the same. The FHA adopted this first in the 1960’s and the Savings and Loan industry followed about 10 years later.
Today about 90 percent of homeowners who have a mortgage have a 30-year fixed rate.
Ken Fears Senior Policy Advisor for the Advocacy Group at the National Association of Realtors® says this, “Quite simply, it’s a bread and butter product. Our parents used it. We are familiar with it. There’s no reason to change it.”
But there are some who would like to see it go away. There are discussions within the FHA and the agencies it regulates as to whether there needs to be reform in mortgages and what that would look like.
Detractors argue that there is a negative impact to homeowners because banks charge a higher interest rate for 30-year mortgages, also there is more interest paid with a 30-year mortgage making the total cost of the loan higher than that of a shorter-term loan. Some say that there is a negative psychological impact to homeowners because of slower growth in equity.
But is change really needed? “We are concerned as an institution that if you mess with a system that’s worked well, many underserved markets will be affected negatively” says Fears.
Fears goes on to say “People of color and urban areas as well as small towns and rural markets-which make up huge swaths of the U.S-these are the engines of middle-income home ownership. They need the 30-year FRM”
Additionally middle income individuals and families are the lifeblood of an economy. They spend money at local businesses. If they can’t afford to do that, the local economy starts to suffer. When that happens, it impacts taxes, school districts, infrastructure, community safety- its a vicious cycle