US Mortgage Terms/Rates

Has the standard for a U.S. mortgage always been 15/30 year fixed or is this something that became more popular after 2007? why are ARMs not more popular in the U.S.? most would opt to save 1-2% over five years versus a 15 or 30 year term if given the choice, especially in an environment where interest rates will remain highly depressed for a long time…

Yes, 15/30 year terms are the norm and have been for pretty much ever. 30 is much more common.

ARMs are available and sold, but they’re not more popular because they generally turned to a fixed rate after five years. Do you think rates are going to be higher or lower in five years?

Well, people don’t “know” that rates will stay depressed over a long period of time. So, they are generally unwilling to sell that optionality. People tend to be willing to pay a premium for a higher degree of certainty. The interest tax deduction probably helps also.

Could you refinance into another ARM in 5 years? I love how uber-conservative U.S. mortgage rates are. Ask the typical Canadian who has a riskier rage structure and they’ll cry out those damned high risk Americans! But here, a good portion of people choose our variable rate products and even our fixed terms are generally 5 years max (though 7 is more mainstream now). Our rate environment is way more risky! 15 year? 30? What the hell? Live a little guys, go with the ARM. Save some bucks.

The only morally justified application of the death penalty is to someone that pays a higher interest rate to reduce taxes.

I just mean it will make people less sensitive to increases in rates. So if the base case is that 20% of people would have chosen the 30y fixed mortgage over the ARM, the tax deducted base might have maybe 40% of people choosing the 30y fixed mortgage.

Right now the 30-year rate is 3.63%. That’s redonkulously low. I’m not going to risk whatever the rate environment is going to be in five years to trim 65bps off my first five years.

Right now I can get a 30 year mortgage for about 3.3% (special program that requires good credit score, 20% down, and six month’s expenses in cash available post close), does it make sense to get a 5 year float at 2% and role the dice to see where rates will be in 2021?

The same argument was made five years ago. The savings have been substantial for those that took an ARM.

Whether it’s an ARM of fixed, I always find it funny that someone claims they know better than the futures curve. “Oh, you’re silly to take the ARM. Rates will be higher in five years.” And on top of that, most mortgages are pre-paid anyway. The fixed is popular because paycheck to paycheck America can’t stand the thought of an increased payment given they bought too much house to begin with. The number one barrier to accumulating wealth in America.

Those 5/5 arms that PenFed pushes are da troof.

You’re missing the point, which is that predictions (even the best predictions) have uncertainty (and even then, the yield curve is arguably not a prediction). People are willing to pay a premium over fair value to hedge uncertainty, since they are not risk neutral. Many people are just not willing to accept the possibility that mortgage rates will increase, making their home unaffordable, even if this comes with the possibility of savings if mortgage rates do not increase.

One could perhaps argue that people might be too risk phobic, or too risky. But then, the argument would have to be more quantitative and not qualitative.

TVM. Saving 65bps today is worth more than paying it up in 30 years in a much smaller balance.

But again, you are not addressing the main issue, that is the potential rate after 5 years is *uncertain*. People are paying more to hedge uncertainty. If you think this is universally not rational, then you should not buy any insurance on anything ever (all are negative NPV). Otherwise, you should qualify your statement by saying people will profit only in some statistically calculated scenario that has to be weighted by non linear utility.

90% of homeowners have no clue what time value of money means.

I think hedging against your own lack of knowledge is also a valid hedge. You pay money for a doctor to diagnose things that you could do yourself if you had the knowledge, for instance.

it looks like the difference between the posted rate 5-yr ARM and 30-yr is closer 100 bps for a total savings of 5% over five years. the 5-yr bond yield would have to rise to 3%-3.3% from 1.3% currently, give or take, to offset the gains made in the first 5 years. this would be a massive shift in inflation and interest rate expectations. also, the average person pays off their mortgage well before 30 years so opting for this term is often excessive and results in higher than necessary interest rates.

i wouldn’t call the difference between a 5-yr ARM and a 30-yr fixed a hedge. that’s an outright bet that rates are going to rise. i could entertian your argument if we’re talking about the difference between a 5-yr ARM and a 10-yr ARM. the fact you’re buying a 5-yr in the first place is already a hedge.

i find the difference between Canadian and U.S. mortgage buyers as peculiar. in Canada, we debate whether we float the rate in real-time or if we hedge by locking in for five years. you guys debate between having it fixed for 15 or 30 years, which is not a debate at all. either way, you’re effectively fixing the rate for the life of the loan. does the mortgage interest deductability entice you to not care and lock it in forever? do the banks have more power in this area and push the long rates so they make more at the end of the day? is there some weird societal shaming toward those who take short fixed terms? there has to be a reason why the vast majority of the population is willing to pay for this type of insurance that is completely unnecessary. do more americans fix their natural gas and energy rates as well? do americans take less risk in general than commonwealthers? if so, this is opposite of the prevailing perception of americans.

The vast majority of people who elect to take out a 30 yr aren’t consciously making a bet on future interest rates, they just want to know that their payment isn’t going to change in 5, 10, 15, or 30 years.

What do you mean? Anything that reduces uncertainty is a hedge. This is like, the definition. One could discuss whether people are overpaying to lock in a certain rate, but that doesn’t take away from the fact that fixing the rate reduces a type of uncertainty. If you pay too high insurance premiums, you are still paying for insurance.

is this a problem with understanding how inflation works? even with 1.5% annual wage inflation, do americans not realize that by locking in their rate for 30 years, in years 27-30, their payment will be half of what it is today in real dollars? you have a better chance of keeping your payment steady in real dollars by choosing a floating rate or short fixed duration mortgage and your payments will be much lower. i know the average schmuck has no idea what i just wrote but do AFers have 15 or 30 year mortgages? if so, why? and do you hedge all of life’s minor uncertainties? energy costs? warranty insurance? identity theft insurance? all that crap that is an unnecessary cost.