Photo credit: Lending Memo
Ed Pinto, co-director of the International Center on Housing Risk at the American Enterprise Institute, recommends retiring the 30-year fixed rate mortgage. He posits that this mortgage type “fails to build up wealth for the most disadvantaged Americans”. His comments are in response to a proposal by five economists to reformulate taxpayer backing of Fannie Mae and Freddie Mac to keep the 30-year fixed rate mortgage alive.
Pinto believes a shorter term loan would especially benefit low-income and minority households because of the earlier payoff. He says benefits would extend into the mortgage market by reducing mortgage debt and eliminating the need for a taxpayer-backed government guarantee, thus bolstering the financial system.
What do you think, should the 30-year mortgage go the way of dinosaurs and dodos?
There are pros and cons to getting a 30-year or 15-year mortgage. Consumers should carefully weigh these pros and cons against their unique financial situations.
The pros and cons of getting a 30-year mortgage
According to the Mortgage Bankers Association (MBA), the 30-year mortgage is America’s most popular type of mortgage. As of a year ago, the 30-year mortgage commanded more than two-thirds of all mortgage loan applications.
Here are the pros of going with a 30-year mortgage.
Over the 30-year mortgage lifetime, the borrower will pay much more than a 15-year mortgage, much of it interest.
Here are the cons of going with a 30-year mortgage.
The pros and cons of getting a 15-year mortgage
Few borrowers apply for 15-year mortgage loans. MBA figures from over a year ago show that only 5 percent of home buyers and 20 percent of people refinancing, seek a 15-year mortgage. The number of borrowers seeking 15-year mortgages have fallen in recent years and this is mostly due to being turned off by higher monthly payments.
Here are the pros of going with a 15-year mortgage.
Here are the cons of going with a 15-year mortgage.
The bottom line:
A borrower with a $300,000 30-year loan with a 4 percent interest rate, would pay $215,609 over the term of the loan, wherein a borrower with the same loan amount, with a 15-year loan term and a 3.25 percent interest rate, would pay $79,441.
A borrower with a 30-year loan could buy more house than they could afford with a 15-year loan. They could also build up their savings, set goals that have incentives such as a college tuition 529 plan, and a 401(K). A savvy investor could take the difference between a 15 and a 30-year loan and invest it into high yielding securities.
If the savings and incentives are not as important as paying off the mortgage in a short period of time, a borrower in a 30-year mortgage could pay off their mortgage in 15 years by making larger payments (assuming there’s no prepayment penalty) and directing the payments to the principle. The borrower could always go back to the 30-year payment schedule if money gets a little tight.
Forbes. The 30-Year Fixed Mortgage Should Disappear
Investopedia. The Pros and Cons of a 15-Year Mortgage
Investopedia. The Pros and Cons of a 30-Year Mortgage
Quicken Loans. Pros and Cons of the 15-Year Fixed Mortgage