Fixed Rate Mortgages

You might find this hard to believe but 30 year fixed-rate mortgages haven’t always been the standard. As part of FDR’s New Deal in 1934, the Federal Housing Administration was created to help Americans purchase homes with affordable terms.

Prior to then, many loans had an amount due at the end of the term called a balloon. Most mortgages had adjustable interest rates even though some might be fixed for a short time. While banks would loan money on a home, they retained the right to call the note due at any time.  (Can you imagine how stressful it would be to know that your bank could tell you at any time, “Pay up now!”)

FHA, during this time, introduced mortgages that offered a fixed rate of interest to the borrower for a 30 year term. This fully amortized loan provided borrowers a financial vehicle that would help them achieve the American Dream while minimizing the risk of having a loan called without the resources to pay it off. It brought long-term stability to the housing market and helped stimulate the economic recovery at a very difficult time in our nation’s history.

Roughly, a third of the mortgages created in 2011 were less than 30 year terms. Many homeowners, similar to those after the Great Depression, would like to get their home paid for as soon as possible. Shorter term mortgages typically have a lower interest rate but higher payments due to fewer years to amortize the mortgage.

My recommendation is to take a 30 year fixed-rate mortgage at today’s fabulous rates.  Then pay extra on your principal each month.  This allows you to pay off your home quicker (saving you thousands in interest charges) but you stay in control.  This way if you have some unexpected expenses, you can hold off on paying the extra principal that month.  If you take out a 10, 15 or 20 year mortgage, you won’t have that flexibility.