Please note the above title is from the print edition–KSH.
How might home buying change if the federal government shuts down the housing finance giants Fannie Mae and Freddie Mac?
The 30-year fixed-rate mortgage loan, the steady favorite of American borrowers since the 1950s, could become a luxury product, housing experts on both sides of the political aisle say.
Interest rates would rise for most borrowers, but urban and rural residents could see sharper increases than the coveted customers in the suburbs.
Read it all from the front page of yesterday’s New York Times.
Most countries do not have the equivalent of Freddie and Fannie, and in most countries the borrower still gets much the same deal. I think this is over blown. What will happen if they disappear is that the banks will have to take some responsibility for the choices they make — instead of expecting the taxpayer to take the hit if they make the wrong ones.
One thing I found totally not understandable was the comment that the fixed interest rate, long term mortgage will disappear. In a free market, you can get a fixed interest rate mortgage — and sometimes it costs you more than a floating rate (if interest rates are expected to rise) and sometimes it costs you less (if interest rates are expected to fall). Long term fixed mortgages are not a result of the Government subsidy provided by Freddie and Fannie. In New Zealand most people take out part of their mortgage like this, and part on floating rate – because there are generally fewer penalties for paying down the floating rate part faster than you think you will so it gives you flexibility – whereas the fixed part gives you certainty.
[i]The 30-year fixed-rate mortgage loan, the steady favorite of American borrowers since the 1950s, could become a luxury product, housing experts on both sides of the political aisle say.[/i]
I worked in a California savings-and-loan in the mid-1980s. In a significant part of the country, especially those caught in the real estate bubbles of the last couple of decades, the 30-year fixed-rate mortgage has been the exception to the norm for a long, long time.
I’ll take a 30-year fixed rate mortgage over a variable interest rate mortgage anytime. I don’t like balloon payments.
Dave Ramsey hates the 30 year mortgage. It is part of financial overreach of Americans. His advice: Buy a house that you can afford with 15 year fixed mortgage. What “afford” mean? Here are his requirements:
* Have your emergency fund fully funded (3-6 months salary in a fairly liquid account).
* Make at least a 10% (preferably 20%) down payment
* Must be 15-year fixed rate loan
* Keep the house payments at or below 25% of my monthly take-home pay.
Dave talks about how they had just got out of college with their first job, and they immediately got a house in their parents’ neighborhood who had been moving up the financial food chain for thirty years.
To find a financial peace university class go [url=http://www.daveramsey.com/fpu/locate-classes/persistId/8848B9F0973285FC723BA5A935DFF761/ ]here[/url]. I think it is important to take the class even if your finances are fairly in order. We need to spread the “gospel” of good financial stewardship.
I was using the 30 year mortgage purely as an example. Ours is a 15 year fixed rate mortgage…..with no balloon payment. And our down payment was significantly higher than 20%.
The above comments oversimplify. The appropriateness of any loan program can only be evaluated in the context of the borrower’s overall financial plan. The fact that few borrowers had plans was (and remains) a major flaw in the system, one that I have been correcting individually for 20 years.
Every loan program can be the best choice under the right circumstances. The key is to look at total loan cost and opportunity cost. While Ramsey’s approach is a good one, the knee-jerk preference for a 15-year loan, without considering what the borrower would do with the cash flow freed up by the 30-year is a weakness. E.g. if the extra cash flow could be used for some sort of tax-favored periodic investment plan (401k, Roth IRA, etc.), a borrower may be much better off to take a 30.
The first step for all borrowers is to have a plan. Then choose the loan that best implements that plan.