Mortgages should not be allowed longer than 15 years, maybe 10.
Two other common ones not true of this comment are using a very young but non-throwaway account with very low karma, and are not responding to any criticism in the replies - true at the time of my comment but I suspect that will change.
Yes, but so what? That doesn't make it wrong.
2) I tend to push for extremes, so the base point seems more reasonable, but yes that was not needed or good to put in.
>> 3) Wildly outside the commenter's area of competency.
That stings a little, but you're not wrong. That doesn't make my reasoning wrong - see some of my replies to others, and feel free to argue against the reasoning.
In Sweden, once your mortgage is below 50% of the of the purchasing price you don't have to pay it off and you're free to just pay the interest in perpetuity.
We can still think of what we wish the rules had been in the begging or what to do after unsustainable housing price increases cause Mad Max anyway.
So does raising interest rates - see 2008. Look at the fed funds rate spike which set it off (not to say there weren't other problems to make it worse). Also look watch the housing market right now.
Housing as a percent of income has been fairly constant for 50 years (there was a recent HN link on this). Lower interest rates mean you can borrow more dollars at the same monthly payment. This combined with an overall decrease in rates since 1980 have fueled the housing market.
Long terms loans just mean building equity takes a long time, and people who sell within 5 years really don't have any (it will maybe cover moving costs). The problems with interest rates changing and putting people under water are really a problem of people not having equity in their home. Reducing the length of the loans will reduce that problem significantly.
Ultimately the price of housing is determined by supply, not interest rates, and supply is still historically low.
Pay attention when you get a mortgage. It goes like this:
1) what is your monthly income?
2) what are your monthly expenses?
3) calculate: this is how much we think you can afford to pay per month
4) back calculate: this is how much we will approve you to borrow.
5) Typical money available determines house prices.
The key here is that #4 means housing prices are hugely influenced by interest rates, and also the length of the loan. Housing as a percent of income is actually fairly constant because they'll everyone wants to get you for as much as they can, but the bank balances that against risk of default so there is a limit.
That's my rant. Reducing the length will cause people to build equity faster and will reduce volatility and the dangers of things like interest rate hikes.
I've done quite a bit of modeling for predictive house pricing and investment questions, so I am very aware of how mortgages, math, and housing markets worth. As far back as around 2001 I was writing pricing algorithms for companies that needed it (look at my resume), and I've done a lot since then. So I'm pretty clear on how they work.
>5) Typical money available determines house prices.
No, house prices are indifferent to what one buyer can afford; they are determined by the entire market of buyers AND sellers. If a seller doesn't want to sell at price X, they will not. If a buyer doesn't want to pay Y, they will not. If a buyer cannot afford price Z, they cannot buy that house.
After your step 4, the buyer knows how much they can afford, and looks at houses already at that price.
>Reducing the length will cause people to build equity faster and will reduce volatility and the dangers of things like interest rate hikes
Over 85% of mortgages are fixed interest rates, so interest rate hikes are not that much of a problem. People can use them to their advantage if they understand the pros and cons, but the vast majority will never be affected.
People have a fixed amount of monthly income they can use to pay a mortgage, so the amount they can borrow is completely predicated on that - their ability to make payments. If they are forced to get short loans, they will only be able to buy lower priced houses, and will miss out on traditional housing stock growth. A 100k investment returns half what a 200k investment does.
Also, many people will be priced out of mortgages completely since cutting loan lengths in half roughly cuts affordable house prices in half.
Finally, even if one can afford monthly payments on a 15 year mortgage, it's still better economically to get a 30 year mortgage and make the payments as if you had a 15 year, except only pay the minimal amount on the actual mortgage and pay the rest into an investment. After 15 years, you will be better off in almost all cases (check the math, last time I poked at it I would be $60k on a $300k house doing this).
As to reducing volatility, if you can just afford a 15 year mortgage for a given house, then you are at more risk since you're not saving cash (as investments) for problems. If you instead turn that into a 30 year, cutting your payments down, and save the excess, you will have cash you can use in case of problems. So this is another benefit to getting a longer loan - you can truly make yourself more resistant to problems and volatility.
A third factor is fixed rate mortgages means the cost of your mortgage goes down over the length of time due to inflation: your income goes up, your mortgage goes down. Inflation gives benefits to borrowers (mortgage holders included) at the cost to lenders (banks).
So, if you check the math, buying a bigger house (up to the limit of what you can spend) and getting a longer term loan historically has resulted in more, not less equity. Model it out and check the math yourself.