There was an interesting article on “The Street”, published several days ago, in which the author speculates that the 30 year mortgage, a traditional main stay of American home borrowing, will eventually be eliminated due to congressional bills that are in the process of being passed. The article can be read here.
As a real estate investor and home owner, I will say without a doubt that the 30 year mortgage will be sorely missed. It often surprises many homeowners I’ve spoke to here in the USA that the 30 year fixed mortgage is a product unique to this country. I have yet to find any other country where banks offer a 30 year fixed loan. If you do know of any, please let me know.
I’ve often been asked by both home buyers and investors what I thought about 30 year fixed mortgages. While each and every person has their own needs thus making the suitability of the 30 year fixed mortgage unsuitable for some, here is the reason why I personally like the 30 year mortgage
1. With lower monthly payments, I have more exit options other than selling my house. For example, with lower monthly payments, I can often look towards renting out my real estate or creating lease-to-own options that might be much more difficult if the payments were higher or a variable rate.
2. It is generally easier to find cash flow positive investments with a lower monthly payment. This has especially been so given the recent historical lows of current real estate prices and interest rates.
3. At the time of purchase, it is much much easier to analyze the viability and returns on an investment when the payments are fixed and known over a long horizon.
And here is why I am cautious about 30 year fixed mortgages
1. The total amount of interest paid is far in excess of the principal in most cases.
2. My personal belief is that it inflates the cost real estate in general. I would much rather pay higher interests on a lower principal than lower interests on a higher principal as interests can always be refinanced but not the purchase price.
If there are any opinions on the benefits and drawbacks of a 30 year fixed mortgage, please feel free to add them in the comments section.
