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Comment by highwaylights | Hacker News Reader

This astonishes me about the US real estate market and is something I was only educated to on HN in the last week or so.

I had absolutely no idea that 30 year fixed mortgages were not only widely available but the common standard there.

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It’s because our federal government purchases the majority of residential mortgages, and therefore indirectly sets the standard for the entire market. It’s a major reason why real estate is such an attractive investment.

Yes. The problem with the article is that it focuses on the value of the asset but forgets the costs. The entire system is stacked in favor of home-ownership by means of tax and bank subsidies.

I can't think of another country that has anything like it, and it's largely because of the government market interference (via Fannie/Freddy especially)

It's going to continue to have some weird knock on effects.

France has fixed rate mortgages

So has the netherlands. (although getting a 30 year long one might be hard, 20 years is far more common).

That are fixed to 30 years out?

This is legitimately fascinating to me that someone would offer that deal.

Lots of places have fixed rate, but not for long periods like the US. Does France offer 30 year low rates?

Too lazy to do the legwork for the actual information, but Japan has, or had, similar mortgages to the US -- even 100-year intergenerational mortgages. An anecdote related to this: when I worked at a Japanese company, one of my coworkers' parents had gone underwater on some commercial real estate in Tokyo after the bubble burst there in the 90s. They had taken out such a mortgage and now the adult children were all working day and night jobs to pay it off.

The Us has bankruptcy laws so that the children don't have to work to pay it off. Though depending on your situation and belief in the future maybe you would want to - if things turn around you have that building, while if you go bankrupt it is sold. (of course we are talking above Japan of 30 years ago so you can now check how things have gone, but that doesn't mean they will go the same next time)

I'm an economist, yet I only recently realized that adjustable-rate mortgages are economists' consensus best choice for consumers. Based on the expectation that personal economics are well-correlated with broad market economics, and that interest rates will decline when the economy struggles.

I have a hard time squaring that with 15 year fixed rate mortgages being under 3% for several years in the very recent past and 30 year fixed mortgages being at/under 3% for part of that time.

How would an adjustable rate mortgage be the best choice for consumers in that situation?

I got an initial mortgage at 5.625%, refi’d to 3.875%, then again to some ~3% 15-year. I never seriously considered an ARM (and now wish I'd refi'd a third time back to a fresh 30-year fixed just to keep using that cheap money for longer).

In past 10 year, variable rates commonly used in Europe have even been sub-0%. Meaning effective rate could have been under 1%.

Most homebuyers don't hold their mortgage to term, whether due to selling or refinancing (like you). All things equal, an ARM will be priced lower than a longer-term FRM, so taking out the ARM with the intention to sell or refinance will mean lower guaranteed costs on the initial mortgage. They're basically a call option on rates during/after the initial fixed term. Even if rates go up a lot (like now), the pre-defined ratchet probably keeps them competitive relative to FRMs. Eventually, a weaker economy probably brings lower rates, especially combined with more equity and a shorter term.

When 30-year FRM rates are 3%, though, take the fixed.

Why don't you get fixed rate so that the rate never goes up. When the background rate goes down you refinance for another lower fixed rate.

It used to be the case that the adjustable rates were lower than the fixed rate. When a 30-year fixed was 8%, a 5/1 (5-year fixed, then adjusting every year) mortgage may have been 5% and a 10/1 may have been 6% for the fixed period.

Once fixed rates got down to the 3-4% range, that seemed to no longer hold and I was frequently offered fixed-rate jumbo mortgages at rates slightly lower than adjustables (I have no idea why they even bothered to quote an adjustable at that point).

If you could get a 10/1 cheaper than a fixed-30 and were pretty sure you'd be moving in 7 years, that's why someone would take out an ARM. (Or, if they could qualify for the ARM but not the fixed-rate payment.)

When have adjustable rates for the same property and money down been higher than fixed? They'd sell approximately zero adjusted rates if that ever happened.

Dec 2008-May 2009 and July 2020-Feb 2021 (for much of early pandemic, I was looking to refinance to lock in an even lower rate that I already had; I didn't manage to lock in the absolute low, but ended with ~3%)

https://fred.stlouisfed.org/series/MORTGAGE30US

https://fred.stlouisfed.org/series/MORTGAGE5US

You do see a sharp reduction in ARM mortgages as a share of total with the interest rate reductions post 2008: https://i2.wp.com/financialsamurai.com/wp-content/uploads/20...

That math is my favorite example of economists not living in the real world. It doesn’t account for the ability to refinance.

It does, in fact. The bank prices that into the loan.

Huh? First, the bank can’t possibly price future interest rates into the price of a fixed loan as they’re by definition unknown. Second, we’re talking about the economic model of which is better for consumers. It assumes no refinancing to lower your interest rate down the road, which is a pretty big caveat.

> by definition unknown

They're a known-unknown. Well-defined risk can be priced in. Black swans / unknown-unknowns can't.

Known in the sense that they know it’s possible, sure. Known in the sense that they know what the likelihood of any given rate increase is over 15-30 years (and are therefore capable of pricing it in)? No.

“Priced in” has a very specific meaning, it’s not a generic term for being aware that something might happen.

The derivatives market for hedging interest rate risk is fairly liquid. They can add the cost of an appropriate hedge (according to their risk appetite) into the price of the loan.

Yep, just need work history and you're set. Lot of people don't want to own because it's a maintenance nightmare and they're not work. I'm out about 60k not including refinancing due to maintenance and I'm handy.

What are the mortgage terms where you're from? In always curious to understand how other countries and systems deal with this but I'm largely ignorant to it outside of anecdotes like this.

The standard in Canada, for example, is a 25 year mortgage which you renew every 5 years (fixed or variable, your choice).

Could you clarify what you mean by "renew"? That sounds a mortgage with rates that are reset every five years, which doesn't sound like "fixed" to me.

I think the technical term for this is a 5/5 ARM which is NOT a "fixed" rate loan. Most of the world borrows with ARMs.

(in some countries) the technical term is “fixed-rate (as opposed to variable-rate) mortgage” - but the mortgage term can be much lower than the amortization period.

If it's the same as in the UK, Australia and NZ, then the rates are "fixed" for sub-durations within the overall length of the mortgage/home loan, and at the end of the sub-duration, you negotiate what the "fixed" rate is for the next sub-duration with the bank / mortgage lender.

So for a twenty year "fixed" mortgage, you could end up splitting that into "fixed" rate chunks of 3 years, 3 years, 5 years, 3 years, 1 year, 3 years, years, 2 years.

So the rate is "fixed" for what's often called the "fixed period" (sub-duration), giving you a bit of stability, but over the longer term of the overall mortgage, things can track interest rates more generally as you renew the rate.

Also the same for the Nordic countries and few eastern Europe ones I'm aware of.

Basically correct - fixed is fixed over the 5 years, variable changes within those 5 years.

So variable, not fixed. Fixed means fixed over the term of the loan. As soon as you recalculate interest rates, it is not longer fixed by any definition.

Nothing wrong with variable rates in certain circumstances but you can't call a 5/5 ARM fixed.

As a matter of fact, you can.

https://www.ons.gov.uk/peoplepopulationandcommunity/housing/...

“More than 1.4 million households in the UK are facing the prospect of interest rate rises when they renew their fixed rate mortgages in 2023.

“The majority of fixed rate mortgages in the UK (57%) coming up for renewal in 2023 were fixed at interest rates below 2%. Those deals that are due to mature through the course of 2024 will be from two-year fixed rate deals made in 2022 and five-year fixed rate deals made in 2019, when mortgage rates were generally higher than 2%.”

To be clear, the rate is fixed during the term of the mortgage (say 5 years) but the amortization period is different (say 25 years).

https://www.canada.ca/en/financial-consumer-agency/services/...

Yet another reminder how challenging cross-cultural communication can be. There is no right or wrong here, just different. They key is recognizing the differences as early as possible to avoid confusion.

The terminology, unfortunately, varies with country. Your terminology is correct for America but in most of the world, "fixed" has a different meaning, because American-style fixed products are nonexistent.

Yes. In countries like Canada, the term "fixed rate mortgage" maps to what Americans would call an ARM. 25-year fixed-rate mortgages are simply not available to individual homebuyers. 5 years is generally the highest rate at which you don't have to pay a steep (ie, 1000 bps) premium for, essentially, adding a call option on your loan.

> a steep (ie, 1000 bps) premium

I think that you have an extra zero there?

Maybe we should split the difference! The best 25-year fixed-rate mortgage currently appears to be 9.75%, which is about 500 bps higher than the best 5-year fixed-rate mortgage [1]. But in 2021 with 5-year fixed mortgage rates near 2%, the 25-year fixed-rate was still around this level. So it looks like the premium has gone down a bit since the last time I checked. Perhaps that's partly a result of the yield curve inversion we have these days, since the Canada 30-year bond yield is presently just 3.2%. [2]

[1]: https://www.ratehub.ca/best-mortgage-rates/25-year/fixed

[2]: https://www.marketwatch.com/investing/bond/tmbmkca-30y?count...

When you wrote “5 years is generally the highest [term] at which you don’t etc.” it sounded as if you meant that for a term of say 10 years you did etc. [The spread between the 5y and the 10y rates is around 100bps.] There is quite a range of terms higher than 5 and lower than 25.

Ah, I see. Yes, my wording could have been better.

In Germany, standard terms are to have the interest rate fixed for 10, 15 or 20 years, independant of how long it takes to pay off. Additionally, the customer has the right to refinance at current rates after 10 years. So a longer fixed rate is always an advantage to the customer, and thus more expensive.

I just love this quote from Sid Verma:

"A lot of Americans are bragging that in their country they can get a fixed mortgage for 30 years. But it's worth remembering that for cultural and historic reasons, a lot of Europeans choose to reject socialism."

https://twitter.com/_SidVerma/status/1575185906218442752?s=2...

Note that the mortgages aren't even fixed rate, since you can replace them with a lower rate mortgage if rates drop, with insignificant penalty. Nobody will sell a mortgage like that if their goal is profit (other than to hand off to the US government).

Insignificant penalty?! Maybe if all you think about is your monthly payment and not the total payment amount over time.

You should check the amortization schedule of a typical 30 year fixed rate loan. You are paying nearly nothing but interest for about 10 years, THEN you start paying down the principal balance significantly more. The first ten years you are basically renting your property from the bank. When you refinance the property the amortization schedule starts all over again where you are barely paying down your principal balance. The banks always need their cut before you are allowed to build equity.

I've refinanced many times to get lower interest rates. Did not pay any "points" or penalties to do so.

> The banks always need their cut before you are allowed to build equity.

I've never had a mortgage that had any sort of prepayment penalty. (Always read the mortgage contract front to back to make sure there isn't one.)

Prepayment penalties are illegal after three years so there's no reason you would pay only interest for 10 years. If you can get a better loan, you can pay all the principal instantly and no more interest.

I think the point was that people with mortgages will opt into lower interest rates but will clearly not opt into higher rates. (Assuming the interest savings is greater than the refinance cost.)

I'm not sure why you bring up the amortization schedule since since you definitely save on the overall interest side of the mortgage. Put another way, if you get the lower interest rate and keep paying the same monthly payment you were paying before, you'll pay everything off faster.

One of the biggest benefits to refinancing is being able to lower your payment and put that money to work elsewhere. Yes you can just keep making the same payment and save some money (less and less the farther along in the loan you are) but most people have debt that is at a higher interest rate than their mortgage so they're better off putting the money there.

I've seen people decry the amortization schedule before as if it's because there's some cabal of evil bankers in monocles twisting their mustaches and cackling about how they're screwing everyone over. It's just how the math works out when you have a 360-payment loan for half a million dollars - there's nothing remotely sinister about it.

Just like renting vs. buying there are times where refinancing to a lower rate will save you money in terms of total paid, and times where you may a similar or higher amount but will save in monthly payments. Like everything else you just need to do the math and see if it's worth the fees to get the new loan or not.

~15% of the mortgage market is ARM in the US

> Nobody will sell a mortgage like that if their goal is profit (other than to hand off to the US government).

Almost one third of the MBS outstanding are held by the Fed - but that means that more than two thirds are held by someone else.

In Germany, 5 - 20 years seems to be pretty common. I haven't seen 30 years, but I wouldn't say it was impossible.

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