Mortgage Products: The Fixed Rate Mortgage
In order to understand the theory behind the fixed rate
mortgage, you have to understand the mindset of the mortgage
banker and the mortgage borrower of thirty or forty years ago.
The Great Depression left a tremendous impression on the minds
of this country, so much so, that one of the popular mortgage
products of the turn of the century, the interest only loan, was
shelved, never to be heard from again. Not until the recent
explosion in real estate prices and the mortgage industries
efforts to accommodate home buyers of all types has there been
such mortgage variety.
The trend after the depression, through post-war America, and
really until the late 1990s was the fixed rate mortgage. That's
the type of mortgage the bank offered, and the public generally
didn't consider anything else. Why did so many individuals, as
well as banking institutions popularize the fixed rate mortgage?
This loan type, more than any other product available, was a
security blanket for the banker, and the homeowner.
The banker, offering the mortgage loan, was assured of a 20%
down payment and a secure monthly payment with a fixed interest
rate that would benefit the bank. The homeowner received a set
monthly payment amount that was affordable, and a fixed number
of years to repay the loan, usually 20 or 30.
Since interest rates weren't fluctuating then, as now, and real
estate prices were fairly predictable, this was a win-win
situation for everybody. Then came the extremely high interest
rates of the 80s, and suddenly bankers were locked into mortgage
with a fixed interest of only 7 or 8 percent. It is at this
juncture that the lending institutions and the mortgage
companies began to re-think the fixed rate mortgage. Maybe
adjustable rate mortgages were better suited for such a
fluctuating market; they could then reassess the interest rate
if the rates skyrocketed. This wasn't something the homeowner
was in favor of using, but really what choice do you have? And
usually, at some point, the rate will swing in the other
direction. That's exactly what happened during the late 90s and
early part of 2000.
Since 2001, interest only loans, 125's and ARMs have grown in
popularity; on average, the interest only segment of the market
is now around 30%. That's an increase from 3% in 2001. The
market has never before experienced the variety now available
for mortgage products, but never before have we experienced the
growth in real estate prices and lowered interest rates that we
have seen in the last 5 years.
The beauty of all this growth, the fixed rate mortgage is like
the little engine that could. It's still around, still chugging
up the hill, and still getting the job done. Statistically, many
homeowners never payout their mortgage; they either sell their
home or they refinance before the mortgage completes. This may
be true, but for many of the homeowners I questioned, their home
purchase was for the purpose of establishing a permanent
residence, one in which to retire and live out their lives. That
makes the good old standard 20 year Fixed Rate Mortgage look
really good, even the 30 is still around (although not quite as
appealing). While there are places in this country that the real
estate market has really boomed, and the real estate prices are
soaring, there are still many that have not felt any effect, and
for whom the appraisal prices of the 90s are still good today.
When you consider the trade-off for the adjusting interest rate,
the flexibility of paying interest only, and the borrowing power
of the 125, it's hard to imagine that they are still homeowners
who wish to use the fixed rate mortgage. That's because, however
you're not looking at the entire picture. Many of these
homeowners have experienced at least one job layoff. Many of the
baby boomers that bought houses 10 or 15 years ago were getting
ready for retirement, and many of the homeowners live on fixed
budgets.
The purpose in purchasing a home for the vast majority of these
homeowners was to provide for themselves a secure, paid for
place to live. These homeowners aren't interest in how to invest
the equity of their home, nor are they interested in the other
options they could exercise when investing their mortgage
payment elsewhere. They're simple interested in paying for their
home, and the fixed rate mortgage is the slow and steady payment
that will accomplish this task.