Are fixed-rated mortgages really that common in US? Around here afaik pretty much all mortgages are variable-rate, generally EURIBOR or something close to it. Or am I confusing things here?
As a purchaser, you would often want fixed-rate. A variable rate is subject to the ups and the downs, but a fixed rate you can always refinance (at a cost, but one that's beaten out in the long-term by better average interest on a typical loan) to a lower fixed rate when available and ignore when rates climb. Since 30-yr loans are common, plans that play out on 5-10yr timescales are relevant. Given that banks are willing to offer them, you'd need an out-of-the-ordinary situation (selling soon, believing rates will continually decrease slowly, not being well educated, unique credit situation making rates favorable for one loan type and not another, ...) to choose a different option.
This is definitely country-dependant. In Sweden you can pay extra with no penalty if you're on a variable rate, so if you have the means, the best option financially speaking is to go with variable and pay it off as quickly as possible (or at least enough to make the raise in interest to be negligible).
Most mortgages in the US can also be paid off with no penalty - fixed or not. A purchaser should prefer fixed if they are available, and only use a variable rate loan for specific circumstances. The low rates of the last few years compressed the rate difference between fixed and variable, that it made almost zero sense to get a variable rate loan.
In the US some can have prepayment penalties, but it's not common. All the loans I've ever been presented (car, house, etc...) were simple interest loans. I would never sign one that was anything other than simple interest.
Funny, cause I think the exact opposite. I've read numerous papers and in Australia at least, you are statistically better off on a variable rate something like 2/3 of the time. You pay a premium for the security of a stable interest rate.
You can also (probably) save money by never buying any kind of insurance, but insurance is a useful risk mitigation. Someone who got an ARM a few years ago and is hitting the variable rates around now probably sees their interest rate roughly double. They likely aren't much reassured by the fact that historically, most people's mortgages had better timing.
If rates are going down they are a great choice as you will refinance in a couple years anyway. However you have to really know what rates (read the economy) will do so that just as they reach the bottom (you don't need to hit the exact bottom, just get close) to refinance to fixed rate.
They are also good if you have reason to believe you won't live there for more than a couple years. (in general renting is better than buying if your time frame is less than 7-10 years, but local factors may force you to buy anyway).
Since ARMs are lower rates they save you money in the short run. However they tend to adjust up after the terms and so can really hurt you.
I would say close to illiterate. I don't know what mortgages are like in other countries, but in the US you want a fixed rate or you want to rent. An ARM can really fuck you up.
> They are also good if you have reason to believe you won't live there for more than a couple years
Generally speaking, it's better to rent in that case. You'll have more flexibility and substantially less risk.
Ignorant here because I dont know how ARMs are actually structured as far as what the lender can and cant do, but the idea of signing a loan contract and having no garauntee of the upper bound of the interest rate is absolutely wild to me. Banks will fuck you at any opportunity they have, so habding then a loaded gun and thinking theyre not gonna raise rates without a reason is crazy to me.
The beauty of competition. The person lending you money always could fuck you over, but the greed of other banks would save you in that scenario. Which they know, so they don't fuck you over. Same reason grocery stores don't wait until you fill your cart up and then jack up the prices as soon as you reach the register.
Back in the 80s and 90s ARMs were very popular in the US because interest rates were high, and the expectation was that they wouldn't stay that way forever. The rate increases had a lifetime cap, so there was a knowable upper bound.
Edit to add: also, if you knew you were going to sell (and confident you could actually sell) within a few years, the lower initial rate of an ARM made sense.
There is also a material spread between ARMs and fixed when the rates are high. When rates are low the spread compresses (same with rates between terms 15/20/30), making the additional risk questionable.
I have a buddy who got a fixed 15y when rates were super low b/c he wanted to pay his mortgage off early. But, locking into the 15y barely lowered the rate vs a 30 fixed. I told him to do the 30 fixed, and just pay it as a 15y. This would give him flexibility if he lost his job or had some other emergency.
Getting a 30y and paying off in 15 is a smart move. For our most recent house, that's we did set out to do, until the last refi (maybe 5 years in to the 30y) when we got a 15y and paid it off in 10 more years.
I used to think that, but i'm not convinced anymore. In the best case it is smart, but I've known too many people over the years that either died before they were able to enjoy the fruits of their investment, or by the time they were that old their body was such that they couldn't do anything without much pain.
Better to pay off the house when you retire and enjoy life a little more. Of course you should save for a nice retirement, but don't plan all for when you get old. (Renting can also work out well, but you need more in other investments when you retire so you can keep paying rent)
You bring up a great and different point. Is paying off early worthwhile at all? I agree with you that it's really not. Given a low fixed rate, paying off a mortgage early is almost never a good financial decision. Particularly with a lump sum. It's most people's largest leveraged investment. Better to keep the cash and the leverage working for you.
Even if there were no limitations in the contract, there's still a market. If your bank diverged too far you can just refinance. And if the whole market is high, inflation is probably crazy and you're watching the principal dwindle to insignificance anyway.
They keep the same rate for 3-5 years. Then you refinance, so they can't do anything. If rates are going up, they can't go up as fast as rates, though in general you should always refinance just before the adjustment.
> If rates are going down they are a great choice as you will refinance in a couple years anyway.
It's also great to put all my money on black if the roulette wheel is going to land on black. Mortgages are long term, making predicting future rates 3-5-10 years out very hard.
> Since ARMs are lower rates they save you money in the short run.
The low rates of the last 5ish years compressed the difference between fixed and variable that there was little reason to take on the variable risk. As rates go up, that calculation will likely change.
> They are also good if you have reason to believe you won't live there for more than a couple years.
You should rent then. The cost and friction of RE transactions are too high for someone not planning to be there for 2+ years.
One more specific example of someone taking a calculated short term risk: home flippers. They have had both good times and bad in the last 15 years. Those who financed with lower costs during hotter markets had better margins.
House flipping should probably be banned, though. It's bad for the homeowners who buy the house because it's invariably low-quality contractors who do the work and they invariably don't do it to code. It's bad for the neighborhood because the residents aren't stable.
You have to do a lot better at prediction in most markets. The other the potential for change gets priced in, while with mortgage you can get todays rates while everyone knows how they will change.
Why? When I looked into it (about a decade ago), variable rates had paid less overall than fixed for every 10 year window over the previous 50 years. I always assumed people getting fixed rate were overleveraged and couldn't assume the rational risk of the variable.
Your statement makes me assume you're financially illiterate...
A variable rate has historically been more beneficial than a fixed rate.
A fixed rate should be seen as an insurance you pay a premium for. If the risk of it going up so much that you can't afford it, then it's absolutely a great idea to get a fixed rate, but otherwise you'll earn more with a variable rate.
Statistically, you're right - the variable rate is usually better. But that's also assuming that interest rates are completely random (which they're not) - a bit of market timing is wise to do here. And the spread compresses when rates are low, making the fixed more attractive then because the premium is lower.
Variable also makes a lot more sense with shorter timelines (either to sale or to early payoff).
Depends on what the rate is. If it's historically low at the time your take out your mortgage you might consider locking in that rate. I certainly would not have been better off with a variable rate, for one example.
Yale economist James Choi certainly doesn't strike me as financially illiterate, yet in his paper "Popular Personal Financial Advice versus the Professors", he finds variable rate mortgages to be a pretty good deal.
Banks set the fixed rate & they more than anyone else knows what will most likely happen to rates in the future because the banks are the ones in closed door meetings with reserve banks/government.
Do you think they'd set a fixed rate where they lose?
Not just fixed but highly leveraged, repayable at any time, and with tax deductible interest payments. All courtesy of the federal government, but sufficiently submerged as to form an upper and middle class that believes they are rugged individualists.
Serves as the vast majority of our government's intervention in housing, with very small sums for (a few) very low income people and basically nothing for anyone in between.
Yes. It means a fixed rate for 30 years. Unless you refinance the only thing that changes is your property tax.
15 years is really the way to go, as it typically isn't that much more per month.
But 30 is the standard.
It might've been just because I got my mortgage at a weird time, but when I refi'd there wasn't really a benefit to going 15 year. The interest rate was basically the same, so it seemed pointless.
You're still (usually) allowed to pay back a 30 year mortgage in 15 years by making extra payments against principle. So the total amount of interest paid would be equivalent.
The advantages of getting the 30 yr are
a) You don't have to keep paying that extra principle on your 30 year mortgage. If you lose your job or whatever, you can fall back to making the regular payments
b) The time value of money aspect. My mortgage is currently well below inflation. $151894 in 2035 dollars might be more expensive than $215838 in 2060 dollars. Especially if you're able to reap the tax benefits of mortgage interest.
Yeah but you can (usually) just pay the same amount with a 30yr as if you had a 15yr mortgage, but you still have the added security that if you fall into hard times, you have a lower mandatory payment with the 30yr.
Also you’re correct about the higher cost of the mortgage, and this doesn’t really work as well at 6%… but if you had a 3% mortgage, you would have better returns taking the 30 year and investing the difference each month. The amount of money you’d make from the returns on that would, on average, be greater than if you paid off the mortgage in 15, then started investing. But yeah, doesn’t work as nicely at 6%.
When I refinanced my 30 year fixed a long while back, I had a choice of 15 or 30 year terms. 15 year was a little lower, but your right that it wasn't much but it was a little lower--so that's what I took. But it was a pretty modest mortgage at that point (when I bought the house it was pretty much a fixer-upper) so I wasn't really worried about making payments. Getting a 30 year as an insurance policy is probably the right answer for many people even if it costs a bit more.
>but if you had a 3% mortgage, you would have better returns taking the 30 year and investing the difference each month
That would have been a good strategy over last decade certainly. Though that's hindsight and you're effectively taking out a loan and investing the money.
Yeah, but there's no prepayment penalty so if the interest rate was the same and you're good with money you should take the 30 year mortgage and pay double every month. That way you have flexibility to half your mortgage payment if you run into financial hardship in a decade.
Obviously it you can't control yourself with money then don't do this.
When I bought my house I went with the 30 year mortgage. The interest rates between 15 years and 30 years were not hugely different and my 30 year interest rate was so low. I ended up really glad I did.
I think people get confused sometimes that they have to pay the total interest. Nearly all mortgages in the US are simple interest loans. Interest is only paid as long as the loan balance is outstanding.
If the rates between the 10/15/20/30 are roughly the same, then the person should take the 30 and pay it back like they would the 15 (~double payments). The reason is the person is now protecting themselves from life change risk. If they lose their job they could go back to making the minimum payment.
Well, there are a bunch of things. Insurance and all the other maintenance and upkeep costs associated with owning a home. But, still, in general locking in a mortgage means locking in costs for the most part even if it doesn't eliminate spending generally.
Yes it does and yes it's wild. A few years back you could have gotten a million-dollar 30-year fixed mortgage loan at like 2% interest. Nowhere else can you get that sort of long-term locked in borrowing rate.
It is wild and why home ownership is such a big thing in the US. I've got a low rate locked in, and been in my house for 10+ years. The house next door rents for 2.5x my total mortgage. My mortgage has barely moved during this time period (taxes and insurance go up). With only modest raises, the relative cost of my mortgage to income has made it something I don't even think about.
Yeah, even ten years is unusual in the UK. If for no other reason than it being quite a bit risk for the bank giving the loan that interest rates won't go up for a decade.
Fixed rate mortgages were part of the New Deal. That part was a response the the abusive banking practices before the great depression. For instance a most loans were interest only. Collateral was subject to 100% seizure on default. The loan could be called in at any time. And the bank could demand payment in either cash or a fixed amount of gold.
It depends. The come and go based on legislation and the current fixed interest rates. They were very popular for a bit but as the fixed rates kept dipping they seemed to mostly vanish. They seem to only really be popular when financial institutions can easily resell them as they tend to target the lower income brackets.
> Are fixed-rated mortgages really that common in US?
Yes, for decades they were the standard. Prior to 2008, ARMs became more common, and now it's a mix but I'd reckon fixed rate in the US is still predominant.
The US federal government is highly involved in the mortgage market in the US through Fannie Mae and Freddie Mac. I don't think 30 year fixed rate mortgages would be something one could find in a "free" mortgage market.
