From Bloomberg:
Tie Me Up, Tie Me Down to Fixed-Rate Home Loan
There’s nothing wrong with fixed — the fixed-rate mortgage, that is.
As the mortgage crisis has unfolded, everyone has blamed the new-fangled mortgages: Interest-only, pick-a-payment, subprime ARMs, Alt-As became pejoratives overnight.
In the midst of it all you didn’t hear people talking much about the traditional model. The possibility that interest rates might go down soon and allow adjustable-rate mortgage holders to pay less for a while was tempting. The fixed format is still viewed as uncool, as paternalistic as, say, an old AT&T phone looks next to an iPhone.
New homebuyers who don’t take the fixed option seriously are playing fast and loose. Even if a recession is around the corner, there are more good long-term reasons than usual to “fix” yourself. A wider mortgage crisis is still possible, and such a crisis will probably lead Washington to demonstrate paternalism on a scale that most of the iPhone crowd has never known.
Consider the emotional forces at work here. Americans have become accustomed to counting on continuous real appreciation in home values.
In the last recession, houses seemed almost business-cycle- proof. Lately, consumers have developed the conviction that inflation and interest rates will always stay low. Increasing house values and low interest rates both make taking out an adjustable-rate mortgage a no-brainer.
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But the future may not be sunlit. Today we can’t expect perpetual increases in housing values or permanently low interest rates. When rates rise, homeowners, especially lower earners, will find ARMs prohibitive.
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Besides, a house is not an iPhone. It’s a necessity. People want their houses to be the safe part of their lives — that’s what all that marketing research about post-Sept. 11 nesting tells us. When you change jobs every 18 months, as so many Americans do, and your health insurance changes even more frequently — if you have it — a simple mortgage whose details you can remember in your sleep is a comfort.
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The best case for a fixed life was made by that Moses of the modern mortgage: Franklin Delano Roosevelt.In the early part of the Depression, interest-only loans were the rule: You paid off the loan, but the arrangement didn’t help you accumulate equity. So were short-term loans, what we today would call home-equity loans. They seemed benignly small against the overall value of the house at the time the loan was made, but turned nasty with deflation. They often forced evictions. Predatory lenders abounded and interest rates varied wildly from city to city.
Roosevelt despised this. He proceeded to ordain the shape of the standard mortgage. Let homeowners put only 20 percent down. Let them pay a fixed rate of about 5 percent. And let them have 20 years to pay off that mortgage.