Monday, January 18, 2010

End The 30 Year Mortgage

One can't buy stocks without putting 50% down, right?

The government put that margin law in place for our own good, to rein in reckless speculation and preserve the integrity of the stock market - I guess.

So why does Big Government not only permit, but ENCOURAGE the masses to commit years' worth of their unconfiscated wages to buying homes with next to ZERO downpayment?

Remember, since it generally costs 6% to sell a home, any property bought with less than that percentage put down is a *fully levered transaction*.

But today, the government, via FHA and the ghosts of Fannie and Freddie, is underwriting mortgages across the country with, maybe, nominally 3% down but it's essentially a smokescreen. Look at this typical *blog post* (ad!) I found in a split-second:

HUD (Housing and Urban Development) is offering home buyers who qualify for FHA loans to purchase a HUD foreclosure with only $100.00 down payment!

And look at the Google ads it's esconced in:

Now it's bad enough that 0% down home *buying* has been sanctioned by Big Government...

But even worse is the additional leverage from 30 year mortgages. Loans of this length, they not only preserve effective *zero equity* status for years, they introduce an even worse ill - *wage slavery*.

I'm 35 years old. Why the bleep do I want to buy a house, and have the same monthly nut at age 65, that I do today? Thirty years is a freakin' eternity. Actually, the monthly nut will be higher when I'm in my 60s - on account of the mortgage interest deduction being less! And that's not counting higher property taxes either.

It wasn't long ago that everyone did 10 and 15 year mortgages. Consider that at a rate of 5.75% today:

$100,000 of borrowed money over 30 years requires $584 in monthly payments.

But the same payment, at the same rate, for a 15 year mortgage will only amortize $70,000.

So there you have it. If homeowners or the government did away with 30 year loans....housing affordability, and hence prices would fall a steep 30%.

Today's $250,000 valued home would only cost $175,000.

And today's $500,000 valued home would drop to $350,000 overnight.

Mind you, these drastic declines would occur only with a change in consumer demand and bank/government supply of debt. They only consider a return to sanity on the debt slavery front. But if the bond market, too, were to regain its sanity....and rates normalized just a bit(!)....look out below.

Leverage is leverage. It doesn't well matter if it's sanctioned by the government or if *everybody else* is doing it.


Funny Circus Bears said...

The US is no different than all others - it depends on wage slaves for it's very existence.

Justin Time said...

Great post. The 30 year mortgage has been around long enough that most people don't even think twice about signing up for a lifetime of debt.

Unless you take out the 30 year in the second grade, you'll be paying it off for the majority of your working lifetime.

Anonymous said...

When was everyone taking out 10 and 15 year mortgages? I sure don't remember that.
As for the 30 year mortgage, it's easy to retire a mortgage way ahead of schedule with modest prepayments.
I will grant you that such knowledge is not readily taught though it should be. It's well within the grasp of someone with your mathematical aptitude. Spread the word ...

I agree that FHA sponsoring mortgages with effectively zero down and long repayment terms is/was a prime contributor to inflated housing prices. All in the name of fostering home ownership, of course.

CaptiousNut said...

When I ask people my parents' age (60-65) they tell me they had such shorter term loans.

Of course, despite those original loans...they still have a tiny, residual mortgage even today - after who know's how many HELOCs to pay for kids' tuitions, home improvements, etc.

As for retiring a mortgage early...

It's not so easy at all - because the prevalence of 30 year loans has pushed the *prices* into the stratosphere.

Most people today don't even have 10-15 grand in cash to buy a used car. With cars, as with homes, the lofty prices force everyone to borrow massive sums. And, at the same time, those lofty prices are a result of a debt-addicted society.

Today people buy homes at roughly five times their present income. For moderate-high earners, figure that after taxes they could only pay off their debt after ten years....IF THEY PUT EVERY SINGLE PENNY TOWARD THE DEBT.

Anonymous said...

So, are we discussing 30 year loans as the culprit or just poor financial management skills in general? Please run the numbers on monthly payments for 30 years vs 20 and decide for yourself.
I am almost one of those 60-65 coots -- very few 15 year loans in my experience. My parents (90 and counting) never had one either.

I agree that prices could never have gotten so high without loose credit terms. And the current retrenchment in prices is in part attributable to tightening credit standards of the last 1-2 years.
(Lack of interested buyers of course being the other big factor)