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A 30-Year Trap: The Problem With America’s Weird Mortgages
(www.nytimes.com)
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this post was submitted on 19 Nov 2023
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Netherlands here: I had no idea the US has 30 year fixed rates. That is insane. Our housing market is fucked and rates are only locked for 10 to 15 years these days.
It's awesome knowing my payment won't change aside from maybe a bit more each year due to any potential tax increase!
How do you not panic realizing interest rates are rocketing and you'll be priced out of your own home and you can see it coming and there's nothing you can do???
What a shit system that must feel like.
It's crazy in the UK too, where 3-5 year fixes are common. I've know folk who at renewal next year will be paying £500-£800 extra, each month.
My biggest impact has been gas and elec, which maybe added that amount to my annual bill. I can't imagine the stress.
Timing worked really well for us. Finished a 5 year term just before the larger rate rises. Broker was telling me to ride it out with a tracker and the inflation/interest rises will be short lived.
Nah, got a 10 year fixed rate at a rate that is around half the current BOE base. He just couldn't understand that we're fine with 10 years at a rate that might be even double the rate banks offer in say 2-3 years. Because we can afford it fine. The risk is low with the fixed rate, whereas the risk of a tracker/standard mortgage almost has to upper limit.
Also, if the rate actually came down to half our fixed rate it would potentially be worth the penalty to exit early. It's still kinda win/win in the UK, but timing can screw you over.
It just feels like a huge gamble. I went the tracker route between 2012 and 2018 only because I didn't want the overpayment restrictions imposed by fixed deals.
Luckily it worked out, had I gone for a fixed rate I'd still be slowly paying it off, at a higher rate.
For every person who did well, there's someone else who didn't, mostly through unlucky timing.
How much did you want to overpay? Pretty sure we're allowed to do something like 10% of remaining balance per year. Which, so far at least has been fine.
And yes, this is generally how the banks work the risks I suspect. They will lose out on some deals, but gain hugely from others. For us, after 10 years of fixed payments there won't be much left (even less if kitchen appliances stop failing and giving us ways to not put money onto the mortgage)
I wanted to pay it down while the rates were low, 10% would've started off ok, but obviously the lower it got, the less that was. Makes sense from the bank's pov, seems a fair trade-off for a fix.
Also insurance increases.
Incidentally, my taxes and insurance are more than half of my total mortgage payment, and are responsible for it increasing something like 30% over a decade.
Part of your house is paid off in that time. All mortgages are structured so that in 30 years they are paid in full. So if in 10 or 15 years you need to refinance somehow it will be cheaper than financing 100% of a residence.
That doesn't mean shit if your rate goes from 3% to 8 % and your payment doubles.
Dit he math. Even if u buy a 300000 house and pay off a full third in 3 years which is absurd.
What's 200k at 3% vs 200k at 8%?
Go ahead, I'll wait.
Not sure why the aggression...
Imagine being 10 or 20 years into your mortgage and suddenly you can't afford your payments anymore due to a rate increase. You have to sell the house and then try to find another one at the inflated rate and then start back from square one.
You'd have to be wildly irresponsible to have that happen. Theoretically you've paid off well over half of your house after 15 years.
Canadian here. It's 5 years for us!
Most people can't afford the real cost of a home and instead end up paying something like 2.5 times the value in interest over those 30 years. Those who can will always go for a 15 year loan and try to pay it off somewhere in the 10 - 12 year range, the rest just pay interest for decades.
In Canada the typical amortization is 25, but you renew at market rates every 3-5 years.
Some people are gonna be fucked raw next renewal period after this rate run but the government instituted a stress test rate you would have to meet to qualify for mortgage which should help keep things stable. Should.
You can also get 15 year loans with fixed rates here in the states. They’re usually .1% better on the interest rate compared to a 30 year, so for most people it doesn’t make sense to go with a 15 year when you can pay substantially less on a 30. Plus homes here are very much a very safe investment. When you own the home you only pay property tax generally after you pay the mortgage and in states like California that can mean an incredibly cheap place to live once paid (I’m talking 100s of dollars a year, though that will go up over time).
People bitch about housing here in the states, and it’s definitely not as good as it once was, but it’s also not as bad as many other places. I travel to Canada regularly and their shit is fucked. 😅
This is actually a significant cause of California's housing crisis.
Are you saying that people living in the homes that they own are causing the housing crisis? Or what?
Yes, absolutely, in California. Generally, everywhere too but that's a much broader topic.
In California specifically, property tax costs are based on the grandfathered price of the house, which means that there are people who inherited homes bought for $30k 80 years ago and still pay that amount of property tax.
This traps both the taxable value of the house and the land itself and keeps it from being developed, when normally someone might be priced out by the taxes a $10 million home would generally cost.
https://www.sfassessor.org/tax-savings/exclusions/reappraisal-exclusion-grandparent-grandchild
It's just one of many reasons (which is why housing costs are insane everywhere), but it is a significant contributor in California.
Generally, the law being written to benefit homeowners is the single greatest cause of our housing crisis, and this is one element of how those laws are crafted toward existing homeowners.
Consider: if homes are "nest eggs" that always go up in value, what is happening to the price of homes, all the time?
Kind of yeah. Prop 13 definitely is part of the issue.
Well that's ridiculous. What do you expect people do to, just give up the house they live in for someone else who needs a house? This isn't Palestine, it's the USA and we are well within our rights to keep living in the homes we paid for.
Love the fact you ignored maintenance cost, incidental repairs, house insurance, and all that. Then you proceeded to sneak in that bullshit at the end.
It’s still quite a bit better than renting. Rents around here cost more than many mortgages.
Don't forget maintenance!
Maintenance is a thing but it's also not "that" frequent, distributed over the course of multiple years, where something of note probably only occurs during 1 or 2, you save. There are totally scenarios where renting makes sense and there can be financial barriers to entry on onwership, but as a long term gambit, if you can afford it, owning wins.
Home insurance isn't required in all states. Usually it is the lender that requires. Of course it's still a good idea to have it.
You can choose to have a lower term mortgage if you want to.