The Intriguing History of the 30-Year Fixed Rate Mortgage

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As part of a complete personal finance education, I submit that the longread article Financing the American Home by Marc Rubenstein should also be required reading. I learned a lot of important facts about the history and meaning behind the 30-year fixed-rate fully prepayable mortgage:

From the consumer’s perspective, it’s an amazing product. It’s a simple loan that offers stable repayments, kept low because they are spread out over such a long period of time. Its kicker is a free option to prepay, which shields the borrower from interest rate risk. If rates go up, borrowers can commend themselves on a great bargain; if they go down, stay calm—the loan can be refinanced without penalty. Win/win.

You’ll only find it in the United States (except for one small European country):

Yet, with the exception of Denmark, it doesn’t exist anywhere else in the world. Even baseball exists in more countries.

Which leads to an interesting observation:

To many, the idea that the US, a beacon of the free market, should support its mortgage market so directly seems odd. The former Governor of the Bank of England, Mervyn King, once remarked: “You Americans are so strange. Most countries have socialised healthcare and a private market in mortgages. You have socialised mortgages and a private market in healthcare.

The article goes on to explore how individual homeownership as a widespread goal has been widely accepted in the US for hundreds of years. Yet, every time the US government tries to shift the mortgage market back towards free-market capitalism, there are no takers. The 30-year fixed mortgage is a clear example of government subsidization (even though they try to obscure it). If the government were to exit the market today and remove their backstop guarantee, mortgage rates (and home values) would have to find a new market-based equilibrium. In other words: tighter lending standards, higher interest rates, and thus at least somewhat lower home values.

So we should be really happy that we have the 30-year fixed mortgage and never pay it off, right? Cheap, dependable leverage forever! I happen to also be reading the book How I Invest My Money by Joshua Brown and Brian Portnoy, where “25 finance experts reveal how they save, spend, and invest”. I’m only about six interview in, but you know what every. single. person. has in common so far? They own their primary home, outright with no mortgage! So even with all of the potential financial benefits of low interest rates, tax deductions, and refinance optionality, they felt the psychological benefits outweighed all of that. Wow. These familiar names that I’ve read and linked to many times, including Joshua Brown, Morgan Housel, Christine Benz, and Bob Seawright (with more to add I’m sure) – they’ve all gotten “the letter” that we got when we paid off our mortgage:

So what’s the best move? Here’s my two cents. If you want to own a home and live in it for the foreseeable future, then buy one for both psychological and financial reasons. Use that nifty 30-year fixed mortgage, but don’t necessarily borrow the max that they’ll allow. Then roughly time the mortgage payoff with your retirement date. Love your awesome job and want to work until 65? Then take your time. Serious about early financial independence? Then refinance or prepay principal to shorten the term, and pay it off as part of one of your final retirement goals. I have to agree that a paid-off primary residence offers well-being benefits that are hard to put a price upon.

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  1. Curious your thoughts when rates are rock bottom low eg 1.75% apr for a 15 yr loan like I recently got…

    If market investments can yield on average 6-8% conservatively why not mortgage ? A home generally speaking is not a depreciating asset like a vehicle

    • That seems like a great rate, and if rates rise in the future that you can get 1.75% on an equivalent Treasury bond or bank CD, then sure keep it for its full term. If you were really going to pay it off, just buy those higher-yielding options instead and you would be making free money on a risk-free arbitrage.

      I agree I wouldn’t be in a great hurry to pay it off, and I don’t think you should pay down extra principal anyway until you’re done maxing out 401k/IRA/HSAs. I’m just saying that you should consider why all of those people listed above, who could go out and get a fresh 15-year loan on their paid off property and invest it in stocks, don’t. For many people, it seems to be part of the process to feeling like you are in a financially comfortable place.

    • Did you have to pay points to get that rate? If so, you have to include those points in your profit calculation. If that 1.75 rate is without points, could you share the name of the company you got it from?

  2. we Americans do have a good deal with our mortgages and low interest rates. Until a few years ago India didn’t even have mortgages. You had to pay the full amount in cash for a flat which is pretty expensive in big cities. I’m also debating whether to pay off my mortgage now that the amount is pretty low and I’m close to retiring. It’s interesting that all the people in the book have paid off theirs.

  3. Having a paid-off home is a great move.

    As for taking the money out and investing, would you normally borrow money to risk in eh stock market. NO

  4. I paid my mortgage off early, but if I had to do it over again here is what I would do. Say I took out a 30 year mortgage in 2020. I would pay the minimum mortgage payment every month. If I wanted to pay extra each month, I would open a separate vanguard account and buy target retirement 2050 (to coincide with the end of the mortgage).
    Once the balance of your target retirement account is greater than your mortgage balance, you can feel like your mortgage is paid off. If you wanted, you could take money out of the vanguard account to pay the monthly payment.
    But you still get the benefit of the mortgage interest tax deduction and higher average growth on your stock/bond portfolio.

  5. I also believe in timing the payoff of your mortgage with retirement. Having as a little debt as possible gives you the comfort and flexibility to sleep soundly. If we all knew stocks would go up and return 7% annually in the next decade; then a mortgage at 3% looks attractive. But we don’t know this so why take on the added risk.

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