It’s no secret that the 30-year deal was the best deal of the last few years.
Back in 2021 (and surrounding years) you can be locked into a mortgage rate as low as 3% for a full 30 years.
Yes, you can get an interest rate of 2.75% for the next three decades, without worrying about the rate going up. ALWAYS.
In retrospect, it’s a wonder we weren’t falling over each other to get one.
Of course, the volume of borrowing during those years was very high, but sometimes I wonder if it was not more than that.
But now that the 30-year fixed is no longer on sale, why do borrowers continue to choose one over other options?
30 Year Fixed Home Rates are a Fixed Rate
Using Freddie Mac data going back to 1972, the 30-year fixed rate came to about 7.75%.
That number takes into account the highest mortgage rates in the 1980s, when 30-year loans rose to nearly 20%.
And mortgage rates are the lowest seen in much of the past decade, with the 30-year fixed rate hitting an all-time low of 2.65% in January 2021.
So it looks like we’re all set and hitting the middle. Mortgage rates aren’t a bad deal today, but they aren’t a bargain either.
They’re just hovering around their long-term average, which goes back more than 50 years now.
The problem is that the average American / was used to seeing a mortgage rate that started with a 2 or 3, and now a rate that starts with a 7 is not understandable.
People can’t wrap their heads around it. How is this possible? How the housing market should work with these rates up?
However, if you zoom out and realize that they are not that high, you may start looking at other things, such as asking prices.
I’ve argued before that “high mortgage rates” are a good distraction from other issues, like high prices.
We can argue that prices are high until the cows come home, but it’s clear that affordability is historically bad.
And something may have to give as levels can become unaffordable as well as unsustainable.
Perhaps 2025 will be a war of sorts between sellers and buyers to find a way to house prices.
But until more things come online, expect prices to stay high. This will vary by market, with metros having more listings seeing lower prices. And vice versa.
How Long Will Today’s Loans Last?
Now back to those 30 years fixed it’s not a deal. If ~7% 30 year fixed is the going rate today, why not choose a different type of mortgage instead?
Why do we continue to set up a 30-year fixed-rate loan if it’s not a great deal? Or if the borrower is expected to withdraw money from it for a long time before it matures?
If you ask your average home buyer today how long they plan to keep their mortgage, they will probably say a few years. Maybe five?
I doubt many of them expect to keep the loan anywhere close to 30 years, or 15 years for that matter.
Even keeping the loan for ten years seems impossible. Is it possible? Of course, anything is possible.
But is it possible? I would argue no. I expect most of these homebuyers to arrange new mortgages before then, probably because mortgage rates will come down at some point.
This doesn’t mean that the 30-year fixed rate will go back to 2-4%, but even if it drops to 6%, or somewhere in the 5s, you can bet that those 7% mortgages will be taken out quickly.
The problem is that the 30 year fixed rate continues to be the default option offered by almost every bank, lender, and real estate agent in town.
Maybe this needs to change.
It’s hard to find a 30-year-old alternative these days
It made sense that the 30-year fixed rate commanded the majority of the mortgage market over the last decade and change.
As noted, they were a screaming deal and there was no point in choosing another option, such as an adjustable rate loan.
The only caveat was that the very rich could get an ARM set in the 1% because of a lover’s relationship.
For many, the planned 30 years that started in 2 or 3 were absurd. Today, not so much.
A fixed 30 year starting at 7 should no longer be the default option. However, it is because lenders usually do not have other options to check.
Even if they offer an adjustable-rate mortgage, the discount rate is usually not very effective.
This is because there is no secondary market for ARMs. No one buys them, so lenders, especially non-bank lenders, don’t offer them. And even if they do, the quality is not worth the risk.
The exceptions are credit unions and other savings banks, both of which hold on to the loans they receive. As opposed to selling them right after they appear.
This is where you can find deals on ARMs. For example, I checked local credit unions in Los Angeles this morning and found rates a full one percent lower on 5/6 ARMs compared to 30-year fixed.
So the average is 5.875% versus the average is 6.875%. Yes, there is risk associated with an ARM, but these loans are fixed for 60 months before they can be modified.
At any time during those 60 months, the mortgagor could sell the property or refinance the loan.
They may also choose a longer ARM, such as a 7/6 ARM, which provides 84 months of fixed rate security before its first settlement.
The point here is that there are other 30-year fixed options out there, and now that the 30-year fixed is not a deal breaker, maybe we should be checking them out, responsibly.
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