It’s no secret that a 30-year fixed contract was the best deal ever just a few short years ago.
Going back to 2021 (and in the surrounding years), you could secure a mortgage rate of less than 3% for a full 30 years.
Yes, you can get an interest rate of, say, 2.75% for the next three decades, without worrying about the rate rising. never.
In retrospect, it’s crazy that we didn’t fall over each other to get one.
The volume of lending during those years was certainly very high, but sometimes I am surprised that it was not higher.
But now that 30-year fixed debt is no longer on sale, why do borrowers continue to choose one over other options?
30-year fixed mortgage rates are undoubtedly average
Using Freddie Mac data going back to 1972, 30 years were determined middle About 7.75%.
This figure takes into account the extremely high mortgage rates of the 1980s, when 30-year interest rates rose to nearly 20%.
Mortgage rates have been extremely low for most of the past decade, when 30-year fixed rates reached an all-time record low of 2.65% in January 2021.
So it looks like we’re right in the middle again. Mortgage rates aren’t a terrible deal today, but they’re no longer a deal either.
They are simply hovering near their long-term average, which goes back more than 50 years now.
The problem is that the average American is used to seeing a mortgage rate that starts with the number 2 or 3, and now a rate that starts with the number 7 is incomprehensible.
People can’t wrap their heads around it. How can this be normal? How is the housing market supposed to work at these rates? High?
Well, when you zoom out and realize it’s not really that high, you might start looking at other things, like asking prices.
I’ve argued before that “higher mortgage rates” are a good distraction from other issues, such as high rates.
We can argue about whether prices are high until the cows come home, but it’s clear that affordability has historically been bad.
It is likely that something will need to be delivered to unsustainable levels as these tend not to continue.
Perhaps 2025 will be a battle of sorts between buyers and sellers to determine the course of home prices.
But until more stock is available, expect prices to remain high. This will vary by market, with metro areas with more listings seeing more downward pressure on prices. vice versa.
How long will today’s mortgages actually last?
Now let’s go back to that 30 year fixed, where it’s not that big of a deal. If today’s average is roughly 7% for 30 years, why not choose a different type of home loan instead?
Why do we keep issuing 30-year fixed loans if they are not worth much? Or if the borrower is expected to refinance long before it is due?
If you ask your typical homebuyer today how long they plan to keep their mortgage, they’ll likely say a few years. Maybe five at most?
I doubt many of them expect to keep the loan for close to 30 years, or even 15 years for that matter.
Even keeping the loan for ten years seems unlikely. Is this possible? Sure, anything is possible.
But is this possible? I claim no. I expect most of these homebuyers will arrange new loans before then, likely due to lower mortgage rates at some point.
This doesn’t mean that the 30-year fixed rate will drop to 2-4%, but even if it drops to 6%, or somewhere in the 5s, you can bet those 7% mortgages will be gone quickly.
The problem is that the 30-year fixed term is still the default option offered by almost every bank, lender and mortgage broker in town.
Maybe this needs to change.
It’s hard to find a 30 year stable replacement these days
It only makes sense that 30-year fixed loans have captured a massive share of the mortgage market over the past decade and change.
As mentioned earlier, these were a bargain, and there was no point in choosing an alternative, such as an adjustable-rate mortgage.
The only caveat was wealthy people who could get a 1% ARM because of a love affair.
For most people, the 30-year fixation that begins with the number 2 or 3 was a no-brainer. Today, not so much.
A 30-year fixed option starting with the number 7 should not be the default option. However, the reason is that lenders often do not have any other alternatives worth exploring.
Even if they offer an adjustable rate mortgage, the rate discount is usually minimal at best.
This is because there is no secondary market for ARM. Nobody buys them, so lenders, especially non-bank lenders, don’t offer them. Even if they did, the price is not worth the risk.
The only exceptions are credit unions and some depository banks, which hold the loans they originate. Instead of selling it soon after it was created.
This is where you can find deals on ARMs. For example, I looked up local credit unions in Los Angeles this morning and found rates 1% lower on 5/6 ARMs versus 30-year fixed.
So a rate of 5.875% versus a rate of 6.875%. Of course, there are risks associated with ARMs, but these loans remain fixed for 60 months before they become adjustable.
At any time during those 60 months, the mortgagee can sell the property or refinance the loan.
They can also choose a longer ARM, such as the 7/6 ARM, which offers 84 months of fixed-rate security before the first adjustment.
The point here is that there are 30-year fixed alternatives, and now that the 30-year fixed is no longer a deal breaker, maybe we should explore them responsibly.
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