Closing Time… Every New Beginning Comes from Some Other Beginning’s End
This week’s “pop” hit is the March of 1998 “Closing Time” by Semisonic. The song talks about new beginnings that take the place of old ideas that were once someone’s new ideas. This is needed in the mortgage business where today’s standard loan is the 30-year fixed rate mortgage. The 30-year fixed-rate mortgage has been around since the 1950s. The loan program is 70 years old! Times have changed, as well as the prices of homes. You must ask yourself, “Why 30 years”? I am sure that back in the 1950s, it was chosen to create affordability for people purchasing their first home and, in most cases, back then, and really until the early 1980s, the minimum down payment was 20%. Times have changed, and now it is time for us to relook at expanding mortgage terms to 40 years, in my opinion. Down payment requirements have already been changed to as little as no down payment programs, so why not expand the terms it appears the 30-yr mark was chosen randomly back in the 1950s, as 30 years seemed like a long time. The average life expectancy in the 1950s was 68. Today, it is 79. That is a 10-year increase. Perhaps raising amortizations by 10 years makes sense…probably not, but I thought it was an interesting correlation and probably as random as the creation of the 30-year amortization mortgage.
What we do know is that the average homeowner lives in their home for about 8 years. This is a far cry from 30 years, and expanding the term should not warrant a higher rate just because the term is longer. Based on current statistics, as previously mentioned, the loan will be paid off in less than eight years either way.
Using a 6.50% 30-year fixed rate today on a mortgage amount of $500,000, the borrower would save a little over $230 per month by simply extending the term from 30 years to 40 years (see calculations below). This would produce a 40-year fixed-rate payment equivalent to a 30-yr fixed rate of 5.875% today. Basically, using a 40-yr fixed rate loan would be like having a 30-yr fixed rate, roughly .625% lower in rate than it would be today. If rates today were 5.875% on a 30-year fixed rate, I am sure you would see a pickup in home sales and a more significant entry into home ownership by potential first-time home buyers.
I simply can’t see the additional risk for the mortgage industry to change an instrument that is now over 70 years old to one that is more appropriate to the changing times. The 30-year fixed rate was truly a new beginning for homeowners in the 1950s, along with TV. But, the change to a 40-year amortization instrument is long overdue and possibly a new beginning …replacing an old idea…for many potential homeowners in hopefully the near future.
Remember… the BEST RATE is a LOCKED RATE… with a float down… ask me about our program that allows you to lock your rate and then float down if rates move lower.
Make sure you (or your buyer) get pre-approved before looking at homes so we can determine if you are looking in the correct price range and have you armed to submit an offer with a pre-approval letter!
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Blog post date: Thursday, August 29, 2024
