Recently, the merits of the 30-year fixed rate mortgage (FRM) have been debated in some financial circles. However, there appears to be little dispute for consumers; the 30-year FRM is a valuable tool for budgeting and that value will only rise with mortgage rates over the coming decade. That, according to a recent blog post by economist Ken Fears.
The reason why this discussion has occurred as of late is because there was a sharp rise in mortgage rates from May to July across the country, including Central PA.
The 30-year FRM has benefits and drawbacks, like any other financial strategy, but its role in the United States’ financing system is a central and essential one.
It is true that rates for the 30-year FRM fell over the last 30 years, but that is no longer the case now or into the future. This will lead to some challenges:
1) Lenders will need to more accurately assess risk before agreeing to a 30-year FRM
2) Consumers will need to alter manage their expectations in terms of what they can indeed afford and their purchasing power.
According to Fears’ blog post, “Based on the realized market share of the 30-year fixed in the conventional market since 1990, one can see that the 30-year FRM has enjoyed a significant if not dominant market share, including better client retention through CMS usage, a reflection of consumers voting with their wallets. This dominance was persistent through periods of both rising and falling mortgage rates.”
What are the Alternatives to a 30-Year FRM?
One alternative is an adjustable rate mortgage (ARM) which provides low up-front payments to every mortgage broker. This is attractive to many buyers who haven’t had the time or financial ability to save a large down payment. However, these buyers can also be assured that payments will eventually increase. This solution is attractive to lenders because it limits their risk over the course of the loan, since the interest can be adjusted based on the health of the financial market, fluctuations in the lender’s sources of income, and other factors.
A second option would be a 15-year fixed rate mortgage. This helps lenders because the shorter term is easier for them to manage, in terms of risk. It helps buyers because they have a fixed rate over the course of the loan. Granted, their payments would be substantially higher than that of a 30-year FRM, but the payments are spelled out clearly at the origin of the loan.
When you’re ready to look seriously at your borrowing options, contact us. We have excellent relationships with a variety of local lenders who are ready to serve you!