Comment by jmspring | Hacker News Reader

Comment by jmspring | Hacker News Reader

From the article: - A mortgage is a bet on the value of a specific home - It’s a bet on local real-estate prices - A mortgage is a bet on interest rates, but it’s an esoteric one

All three make massive assumptions (read the article). For me, there is something much simpler:

- the thirty year mortgage was to lock in housing at a fixed price (barring property taxes and utilities/etc) at a fixed price where I am paying into eventual ownership

The article also ignores the fact that during a period of lowering rates (assuming equity in the house), one can often refi to those lower rates. If the market craters or rates go up, unless one is speculating, it doesn't matter - the rate is locked.

This article spends too much time attacking a mortgage product that applies to pretty much any other mortgage, but those (like X/1 ARM mortgages) have bigger risks.

In reality - one must guage their intent (flip/keep for period of time/never sell) and choose the product accordingly.

I read some of it, he implies blame against 30 year mortgages for the 2008 financial crisis. When the reality is blame lies with exotic and adjustable rate mortgages, collateralization, corruption of the rating and underwriting industries, and political failure[1]

And you are correct, the vast number of 30 year mortgages don't last ten years much less 30. The author also skips over that 5 year mortgages that existed previously were interest only and could be called in at any time. Worse the lender could require payment in gold or cash, whichever was higher. You want toxic, that's toxic.

[1] Banks which are purely virtual organizations were 'saved' while families were physically thrown onto the street.

I read through more of it after my comment. The real issue / culprit was the creative ways to get people into homes that could not afford them realistically - be it ARMs or X-year fixed loans.

Not being able to afford a home has everything to do with stagnant wages and asset inflation. That's a policy choice our society has made. Exotic mortgages and corrupt underwriting was just trying to paper over that.

Yeah, I thought this article was going to focus on something else, like how ridiculous a 30-year loan is in comparison to a 15-year.

Somewhat informative either way, but really I feel like I learned more about Fannie and Freddie than why the 30-year is toxic, which I have my own reasons for believing.

I just bought a house and compared, for the same loan amount, the difference between a higher monthly payment (for a 15 year loan) versus a lower monthly payment (for a 30 year loan) and investing the difference between the 15 and 30 year payment at 8% annual return, and the 30 year approach came out way ahead because of the additional compounding investment return from those first 15 years. if the apr is significantly lower (4.75% vs 8%) than the expected annual investment return, it's kind of a no brainer, isn't it?

Where are you getting consistent 8% returns year over year though?

My best guess would be the long term returns of the S&P 500 is 7-8%. If you look at the returns relative to inception date 1993 SPY is like 9%.

[1] https://us.spdrs.com/en/etf/spdr-sp-500-etf-SPY

I meant average return over 30 years, not necessarily 8% consistent every year. https://www.bogleheads.org/blog/three-fund-portfolio-returns... https://advisors.vanguard.com/VGApp/iip/advisor/csa/analysis...

Jack Bogle, Blackrock, and other knowledgeable market participants are predicting lower future returns into the future (~4%) for a variety of reasons (structural, global and domestic growth that won’t be repeated), muting any arbitrage benefit between your mortgage rate and investment market returns. History will show (IMHO) homeowners should’ve just applied more towards their mortgage principal, and thrown solar on their roof if they could from a risk adjusted returns perspective (both “investments” I list are guaranteed, whereas the equities and non-US treasuries bond market is not).

Thanks, I just modified my spreadsheet predicting 4% annual return for the next 15 years (although the article I could find with Bogle's prediction is a decade of 4% returns) and then 7% thereafter. The 30Y loan still comes out ahead, but very slightly (less than $3000 advantage on about $2M expected value of the portfolio). Such is the time value of money.

Agree with you about solar panels (and other efficiency upgrades) - my initial remodeling plans are improving sealing, insulation, and upgrading to a more efficient furnace. Already got the smart thermostat!

Keep in mind the 30% federal tax credit on solar starts phasing out after this year, and you may have other incentives available (state, local, utility) that reduce payback time of your solar install to 4-7 years; every kw after that is free! Hope my comments have been helpful.

The expected annual investment return is not 8%.

Adjusted for inflation, long term is more like 7%. There have been some really ugly periods where returns were a lot less, however, sometimes lasting more than a decade. For a 30 year timeline, though, it's been a pretty good bet.

I'm with you. I have a 30-year 3.75% mortgage and I've been throwing the rest of my money into investments. With the tax benefits (up until this year, at least, not sure where we will end up after the recent legislative changes) our effective rate is definitely less than 3.75%, and a lot lower than the long term returns I've been getting in equities.

My strategy was to pay off my mortgage quickly. After 5% down I saved anough to have a year of money to survive on if need be. After that every penny went to the principle so it was payed off after seven years. Best decision I ever made.

Your strategy is preferable if those numbers are correct and if the person following the strategy is actually investing the difference they saved and they're keeping the mortgage for the full term. I doubt most people are this disciplined, but otherwise I get the idea and definitely considered it myself.

I would prefer to be able to dump all of my extra income into the mortgage and be done with it in 5-7 years, which can be done with either a 15- or 30-year. I'm generally pessimistic about markets and the possibility of there being a downturn, so I'd rather not having a housing payment at all (property tax and maintenance not included), as soon as possible.

As a final note though, re: the "toxicity" of the 30-year, I think that the average person's experience with a mortgage is neither of our stated strategies. The average person isn't picking a 30-year and investing the difference between what they would have gotten on a 15-year. They're picking a 30-year, making minimum payments, probably not saving much outside of this, and potentially selling/moving or being tricked into refinancing within 7 years--when most of their payments were all going toward interest and they built very little equity into their home. That's my problem with the 30-year mortgage.

Depending on the rates and down payment, it's not uncommon to need >10% gains in the invested difference for the 30-year to beat the 15-year mortgage. The 15-year mortgage has proved to be much more advantageous in my case.

See https://www.mtgprofessor.com/A%20-%20Term/30_years_or_15.htm

For sure. In another post I compared today's rates for 30Y and 15Y with 15 years of 4% returns and still came out (slightly) ahead. I'm interested in how you determined that the 15 year was more advantageous (did you calculate what your cash flow would have been with a 30Y?) and if it was a big advantage because you perhaps got lucky with market timing and finishing up your mortgage when the market is low (which really isn't something a new mortgager can rely on), or because the interest rates were at parity with the investment returns of that era, which would make it smarter to pay off quickly.

People play these games but the mortgage is a millstone around your neck until it’s payed off. There is a psychological value in owning your home outright than which so reduces the worry level and stress that it improves your quality of life and probably extends it.

Buying a house is one of those immense milestones in life. Paying it off completely is one of life’s major accomplishments. So a few percent ain’t worth that psychology.

>The article also ignores the fact that during a period of lowering rates (assuming equity in the house), one can often refi to those lower rates

This fact is one of the central themes of the article.

>If the market craters or rates go up, unless one is speculating, it doesn't matter - the rate is locked.

Another central theme is that the housing and labor markets are highly related. Homeowners are least able to relocate for opportunity when it is most important to do so.

You obviously didn't read the whole article because he explicitly covers refinancing during favorable rate changes - he has a whole section on 30yrs basically being implicit long vol trades on rates.

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