Should the 30-Year Mortgage Be Retired?

• September 3, 2010
• 7 Comments

by Mark Wellborn

Arkadi Kuhlmann, the president and CEO of ING Direct, wrote an op-ed for The Washington Post today that puts forth the idea that the 30-year fixed rate mortgage should be phased out in place of shorter-term loans.

Kuhlman writes that long-term mortgages are better suited for a time when Americans stayed in one home for most of their lives. Also, the interest costs, moderate increase in equity, and the costs associated with re-financing makes the 30-year mortgage rather unattractive despite the current record low rates. Kuhlman believes that there is a better option: short-term, fixed-rate loans.

From the column:

“On a typical $225,000 mortgage, a buyer who gets a five-year, fixed-rate mortgage at 3.5 percent might well pay 4.75 percent for a 30-year loan. The savings would come to more than $11,000 when it’s time to refinance the five-year agreement.

The savings generated from shorter-term loans could be put directly toward paying down the principal by consumers eager to build equity. Instead of chipping away at their mortgage over half a lifetime, people would achieve the security that comes from homeownership much faster — and our nation would be encouraging savings, not debt. And anyone worried about a potential rise in interest rates could simply refinance at a different point or for a slightly longer period.”

The ING CEO points to Canada as a successfull model of shorter term mortages, noting that less than 1 percent of homeowners in that country are behind on their mortgage payments, compared to 14 percent in the U.S.

This article originally published at http://dc.urbanturf.com/articles/blog/should_the_30-year_mortgage_be_retired/2446

7 Comments

1. joe said at 8:20 pm on Friday September 3, 2010:

   the ability to get easy credit is a double edged sword. on the one hand, i can buy a $500k house. on the other hand, it will take 30 years to pay it off. this causes inflation of home values b/c people can afford a more expensive house. the big winners in a 30 year mortgage are the banks. this should really be reformed but the politicians in america work for corporations so it will never happen.

1. Geori said at 10:16 am on Tuesday September 7, 2010:

   ING is a bank.  To them it doesn’t matter if people are paying the interest on 30 yr notes or 5 year notes, just as long as they are paying.  Shorter term notes will have many positive impacts on banks:

   1) less interest rate risk.  Right now people are refinancing 30 year notes at record low rates.  In about 5 years once rates go up, banks are going to be screwed with tiny returns
   2) increased liquidity
   3) higher turnover = more fees
   4) It makes accounting sense.  The duration of the note matches the expected length of ownership

1. Calling John Galt said at 10:26 am on Tuesday September 7, 2010:

   Thanks for calling the article out UT.  I agree with Joe’s comments save the last sentence which is somewhat contradictory.  The politicians, at least the ones currently in power (but hopefully not for long), actually prefer the long debt schedule as they think homes can be afforded by more buyers (See Community Reinvestment Act) although many of these buyers shouldn’t be anywhere near the homes they are buying.  While the banks make more money of a longer term note, they would probably love to shave some risk out of the equation and have debtors on the hook for shorter time frames and be able to roll there money that much faster (thereby making more money). They should make the 15 year much more attractive and especially for Jumbo loans.

1. Shanel said at 11:04 pm on Tuesday September 7, 2010:

   Ok I need a little help with this one.  I am a first time homebuyer with less than 20% down.  Why would a 5 year mortgage make more since to me than a 30 year?  Even if I received a 1% discount on an already low interest rate.  The montly payments would be so high I wouldn’t even consider purchasing.

1. FCResident said at 10:16 am on Wednesday September 8, 2010:

   Shanel - not to sound unsympathetic to your situation, but offering more solid loan products that would force consumers to save more for a better downpayment is the point. I don’t know if we as a society want to go back to my grandparent’s time when you needed 50 percent for a downpayment, and a 15 year loan term was incredibly rare (more like five to ten year terms), but people paid off their houses and were not indentured servants to their mortgage payment. I think making it harder for someone to get a mortgage may not be a bad thing. You can always rent. It’s not like we don’t have an ample supply of housing in the DC area. Just FYI, I am a renter too.

1. Lauren said at 11:26 am on Wednesday September 8, 2010:

   I think a 5-10 year mortgage is extreme, but friends of mine who have bought houses in cities where housing is much cheaper, used 15-year mortgages, which I think makes a lot of sense. Since they were able also to buy in their mid-20’s, that means by their early 40’s they’ll own a paid-off house, only having to pay taxes and repairs.

   Meanwhile here in DC where most can’t afford to buy into our 30’s, and use 30-year mortgages, we’ll still be paying off the loan up to or even into retirement. There are a lot of advantages to living here, but it’s not without some painful tradeoffs.

1. Melissa said at 12:07 pm on Friday September 10, 2010:

   I just bought my first house here in the DC area and I am in my late 30s. I would not have been able to afford to get my house had I been forced to take a 10 or 15 year mortgage.  I will probably refinance and get a shorter term when I (hopefully) make more money, but my point is while 15 year mortgages sound ideal, they aren’t ideal when you can’t get a decent house or townhouse close to the Beltway for under 300K.  Most of the so called “deals” in the DC area are in the exurbs and if you don’t live and work in the exurbs, then you have an awful commute.  Becomes a quality of life issue too.  15 year mortgages may work in less expensive areas, such as the midwest (excluding Chicago).

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