The Old Standby: the 30-year fixed mortgage

[don]

A fellow 'tuliper and I were discussing the merits of cash vs today's 'historically low' interest rates in buying an abode to live in, with a time frame of 10 years.

That led me to analyze the 5% (lower is out there but this serves as an example) great deal that's just waiting for us to sign (and initial 30 times).

My numbers:

Costs of a 30-year fixed @ 5% per $100k:

First 10 years total payments: $64,320.

Loan balance: $81,342.

Principal paid: $18,658

Interest paid:$45,662

Interest paid as simple % of total payments: 71%

Quite the deal.

My conclusion - the rate of interest only affects the monthly payment and for the majority of owner-occupied buyers, serves more as a sales inducement that any loss of $$ to the lender. The amortization schedule took care of that some time ago.

Do any of us know the history of the amortization schedule and how it became the loaded gun it is today?

What's the actuary tables for 2nd and 3rd decade mortgage payments? Must be pretty dismal.

And then there's the interest paid 'upfront', in distinction to the above front loading, in the form of loan origination fees and points.

I'm not considering the 'homeowner interest deduction' because I think Hudson has that right - a gift not to the buyers but to the banks, allowing an inflated house price (raising all of the above revenue streams into FIRE's melting pot) and saving the new buyer nothing.

How many of us look at the 30-year in this light?

[pmmeaney]

Re: The Old Standby: the 30-year fixed mortgage

right on Don. These are really incredible numbers. If you buy right now and there is another 10% price drop, you'd have to wait nearly 10 years to get back to even because of the commission and other costs at selling time. Renting is still looking pretty good right now.

[don]

Re: The Old Standby: the 30-year fixed mortgage

right on Don. These are really incredible numbers. If you buy right now and there is another 10% price drop, you'd have to wait nearly 10 years to get back to even because of the commission and other costs at selling time. Renting is still looking pretty good right now.

Buying now, unless you're in a confidently rock-bottom market, you should anticipate a 20% further drop in whatever you paid, plus a 6% realtor fee to sell.

In the 10-year example, crank an additional 26% ($26,000/100k borrowed) off the top and with a $18,658 hard-paid equity, you have one unhappy pilgrim.

[c1ue]

Re: The Old Standby: the 30-year fixed mortgage

Do any of us know the history of the amortization schedule and how it became the loaded gun it is today?

As far as I understand it, the payment schedules have been that way for at least 30 years.

The whole point is that the banks offset their long maturity risk by getting their profit up front. If anything happens, the property's inherent value offsets the principal risk.

Of course these days that principal risk is much higher than it used to be even for non-securitized vanilla banking models.

Throw in a more mobile society, and now you're talking serious money.

[Starving Steve]

Re: The Old Standby: the 30-year fixed mortgage

It is not a matter of squandering money on a home, but that has to be compared to squandering money on rent payments. And rent keeps going up. So which is cheaper in the end, renting or owning?

In most places, Detroit being an exception, the days of $500 per month rent for a large apartment are long gone. And there are hidden costs to renting, like washing clothes, drying clothes, utility costs, parking costs, pet surcharges on the rent, damage deposits that get "damaged", the higher income taxes that renters have to pay when compared to home-owners with mortgages in the U.S, etc. Those hidden costs used to be negligible, but they are not negligible now.

Try renting in New York City or San Francisco, Vancouver, or San Jose at over $2000 per month, and then tell me that renting is cheaper in the long-run than owning. The decision whether to rent or to own is not quite so easy to make nowadays, especially now when the capital not vested into real property earns absolutely zero in the bank. Whatever you pay in rent to-day diminishes your principal in the bank now, whereas formerly the interest alone at the bank would easily pay for your rent..... The bottom-line is that unless renters work or have other income to live-on such as pensions, they exist on a burn-rate to-day, and nothing more.

One more consideration in the economics of whether to own or to rent: Rents (and hidden costs of renting) tend to increase as time passes, especially when apartment buildings are sold or flipped to new owners. Landlords, and their management companies, are no longer running charities for renters to enjoy.

[don]

Re: The Old Standby: the 30-year fixed mortgage

As far as I understand it, the payment schedules have been that way for at least 30 years.

That means the very first fully-paid 30-year note was this year. Congratulations, whoever you are

[Thailandnotes]

Re: The Old Standby: the 30-year fixed mortgage

At the end of 20 years, you still owe half the principal. If you bought the house in your mid 30's, you're in your mid or late 50's. Your parents die. The sale of their house allows you to pay off your mortgage except the prepayment penalty is 6 - 9 %. Up until the S&L crisis prepayment penalties were illegal. Laws were changed in order to allow these institutions to grow out of their fraud.

[labasta]

Re: The Old Standby: the 30-year fixed mortgage

It is not a matter of squandering money on a home, but that has to be compared to squandering money on rent payments. And rent keeps going up. So which is cheaper in the end, renting or owning?

In most places, Detroit being an exception, the days of $500 per month rent for a large apartment are long gone. And there are hidden costs to renting, like washing clothes, drying clothes, utility costs, parking costs, pet surcharges on the rent, damage deposits that get "damaged", the higher income taxes that renters have to pay when compared to home-owners with mortgages in the U.S, etc. Those hidden costs used to be negligible, but they are not negligible now.

Try renting in New York City or San Francisco, Vancouver, or San Jose at over $2000 per month, and then tell me that renting is cheaper in the long-run than owning. The decision whether to rent or to own is not quite so easy to make nowadays, especially now when the capital not vested into real property earns absolutely zero in the bank. Whatever you pay in rent to-day diminishes your principal in the bank now, whereas formerly the interest alone at the bank would easily pay for your rent..... The bottom-line is that unless renters work or have other income to live-on such as pensions, they exist on a burn-rate to-day, and nothing more.

One more consideration in the economics of whether to own or to rent: Rents (and hidden costs of renting) tend to increase as time passes, especially when apartment buildings are sold or flipped to new owners. Landlords, and their management companies, are no longer running charities for renters to enjoy.

Just the opposite Steve.

It's the hidden costs of owning that can be very high. If anything goes wrong in your home, you have to repair or replace it. Washing machine breaks, damp got in somewhere, painting, roof tiles. Any maintenance whatsoever and the bill is yours.

At the end of 10 years in the rent scenario you have no property, but in the 10% decline scenario on selling, you also have no capital made so you are in the same boat.

[jiimbergin]

Re: The Old Standby: the 30-year fixed mortgage

As far as I understand it, the payment schedules have been that way for at least 30 years.

The whole point is that the banks offset their long maturity risk by getting their profit up front. If anything happens, the property's inherent value offsets the principal risk.

Of course these days that principal risk is much higher than it used to be even for non-securitized vanilla banking models.

Throw in a more mobile society, and now you're talking serious money.

30 year notes became common during the depression and became the norm thereafter.

[flintlock]

Re: The Old Standby: the 30-year fixed mortgage

How many would lend their own money @ 5% for 30 years?

The amortization schedule is simply continually calculating the interest on the remaining balance, right? So isn't it the length of the loan that is perhaps foolish for the buyer, not the way the interest is calculated?

[BK]

Re: The Old Standby: the 30-year fixed mortgage - Homes Depreciate

I agree. Homes are in a constant process of depreciation.

Lets compare buying some Gold Bullion and sticking it in your safe deposit box - it remains unchanged for years - forever. There is No work required to keep the value constant - its worth what the market says it is worth.

A home is constantly decaying and depreciating. The lawn has to be mowed, the driveway shoveled, the leafs have to be picked up, the tree that falls in your yard needs to be cleared, when your tree falls into the neighbors yard or house, Things that wear out include the appliances, the roof, the windows, the heating system, the paint or wall paper.

Think of that home in your neighborhood where the home owners are choosing the 'No Work' approach to home owning - how long will it take to sell and what will be the discount to the buyers?

I would agree for many owning a home has been an excellent choice - it depends on your employment prospects and the geographic region you call home.

People hate to acknowledge the tremendous amount of work that is required to keep the value of your home constant over time never gets presented.

[flintlock]

Re: The Old Standby: the 30-year fixed mortgage

Just the opposite Steve.

It's the hidden costs of owning that can be very high. If anything goes wrong in your home, you have to repair or replace it. Washing machine breaks, damp got in somewhere, painting, roof tiles. Any maintenance whatsoever and the bill is yours.

At the end of 10 years in the rent scenario you have no property, but in the 10% decline scenario on selling, you also have no capital made so you are in the same boat.

I see people who grossly underestimate this every day. Many go into a RE deal with the expectation that a home built in the 1960s will have no more problems than one in the 2000s. First time buyers especially make this mistake. Energy efficiency differences alone should be a major factor in what you pay. Utilities are becoming more expensive than the mortgage note for many. Yet I still go into homes with less than 1" of matted down insulation in their attics. Single pane windows. Un-vented attic spaces. Crawl spaces with no insulation. Old inefficient furnaces. Not to mention the decrepit wiring, plumbing and HVAC. Codes were less strict in the past and time only brings to light any weaknesses in home construction. Unwary buyers then compound their error, in an attempt to minimize their mistake, by hiring the lowest bidder to do the work, which often leads to paying twice to get it done correctly.

My advice to empty nesters wanting to downsize to a semi-retirement home: Buy the newest, best built, lowest maintenance, smallest home you can get by with. Not only are utility and maintenance costs getting more expensive, but we often forget that we can no longer do things in our old age that we used to do, like gutter cleaning, yard work, crawling through tight spaces, etc.

[don]

Re: The Old Standby: the 30-year fixed mortgage

How many would lend their own money @ 5% for 30 years?

The amortization schedule is simply continually calculating the interest on the remaining balance, right? So isn't it the length of the loan that is perhaps foolish for the buyer, not the way the interest is calculated?

It's seldom seen in that light. The small principal reduction is treated by most home buyers as, 'just the way it is, what are you gonna do?' Comparing bank lending to our personal finances is like comparing balancing our checking accounts to the national debt. Two different birds. Often a lender bundles mortgages and sells them to a third party. That was before the MBS/derivative frauds commonplace today. Obfuscation rules in home mortgage lending and for good reason.

[don]

Re: The Old Standby: the 30-year fixed mortgage

we often forget that we can no longer do things in our old age that we used to do, like gutter cleaning, yard work, crawling through tight spaces, etc.

Who's forgetting

[flintlock]

Re: The Old Standby: the 30-year fixed mortgage - Homes Depreciate

I agree. Homes are in a constant process of depreciation.

Lets compare buying some Gold Bullion and sticking it in your safe deposit box - it remains unchanged for years - forever. There is No work required to keep the value constant - its worth what the market says it is worth.

A home is constantly decaying and depreciating. The lawn has to be mowed, the driveway shoveled, the leafs have to be picked up, the tree that falls in your yard needs to be cleared, when your tree falls into the neighbors yard or house, Things that wear out include the appliances, the roof, the windows, the heating system, the paint or wall paper.

Think of that home in your neighborhood where the home owners are choosing the 'No Work' approach to home owning - how long will it take to sell and what will be the discount to the buyers?

I would agree for many owning a home has been an excellent choice - it depends on your employment prospects and the geographic region you call home.

People hate to acknowledge the tremendous amount of work that is required to keep the value of your home constant over time never gets presented.

I agree completely. Its hard to put a value on it all, but I've probably spent tens of thousands( my time + cash) on my relatively new home( 8 years old).

My neighborhood is starting to have some of those neglected type homes appear, despite an HOA that is supposed to prevent it. Hopefully this doesn't continue. One that really bothers me is the guy who drives a $100k+ 911 Turbo and bought a $7000 mower to cut his grass, but won't trim the dang Bermuda runners crawling over a foot long onto the curb.