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Comment by d_t_w | Hacker News Reader

Question from an Australian(ish) here.

If you Americans buy a house with an 8% mortgage today, can you remortgage in the future if/when the rate drops. Is the buy-out penalty of remortgaging somehow higher than just selling / repurchasing?

Do people get locked into higher mortgage rates for long periods of time that are uncompetitive is my question. Is there a significant downside? Is 30-year fixed normal in the states?

30-year fixed rates don't exist in Australia. You'll get a 5 year fixed rate from ~6% or so, that's about it.

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The American mortgage market is very unique from the perspective that it has 10, 15 and 30 year fixed rate debt. There are generally no prepayment penalties and no balloon payment (each payment is the same amount even the last one). You can pay down extra any time you want and it reduces your principal appropriately.

The maturities and payment structures are quite generous compared to many other countries mortgage products. Of course there are shorter maturities and different types of adjustable rate mortgages but these are not popular (fallout from 2008 crisis and the general low interest rate environment).

Edit: there is also 40 year fixed products starting to be offered.

What is the cause of it being do different from the rest of the world?

Government policy. The US has multiple quasi-government mortgage market makers (because just one is somehow not enough...) that define baseline terms for home mortgages, and everyone must play their tune. See Fannie Mae and Freddie Mac. Seriously. That's what they're named.

There is another one tangentially involved as well that I can't remember the name of.

Exactly. Fannie Mae and Freddie Mac buy about around 70 percent the mortgages issued by banks. They only by conforming mortgages, meaning conforming to their terms.

https://www.investopedia.com/articles/economics/08/fannie-ma...

See also the Federal Housing administration which insures loans.

https://www.hud.gov/program_offices/housing/fhahistory

One can see there really isn't a laissez faire free market at work when it comes to housing in the US. The government is in deep and it's regulated out the ying yang.

> One can see there really isn't a laissez faire free market at work

One would think. Yet there is never a shortage of "See! That's Capitalism For You" comments.

> See Fannie Mae and Freddie Mac. Seriously. That's what they're named.

Well, colloquial names for "FNMA" (Federal National Mortgage Association) and "FHLMC" (Federal Home Loan Mortgage Corporation) anyway

We also have 20 to 30 years fixed rates in Belgium. It seems to be possible in France, Germany, The Netherlands, …

So I’m not sure that the US is actually an exception.

A family member recently got a long term fixed low rate mortgage in Belgium and I’m curious about how different things are compared to the UK. UK mortgages are higher, shorter term.

Is the Belgian bank losing money compared to the UK one? Is there state intervention?

There is no state intervention. Depending on market conditions, a 30 years fixed can have a higher rate than 25 years.

It’s basically hedged with long term bonds (Belgian or European) + a profit margin for the bank + risk based on your profile (age, health, employment history, …)

I guess UK banks are just hedging with shorter term bonds compared to Belgian ones.

In the UK it's long been possible to get a kinda long term fixed rates - at least 10 years.

They just don't tend to sell very well - when interest rates are low [1], it's not particularly appealing to fix at 2.69% for 10 years when you could fix at 1.94% for 5 years or 1.25% for 2 years.

And coming off the back of two decades of rock bottom interest rates, a lot of people didn't anticipate that they'd be remortgaging at a >5% interest rate.

[1] https://web.archive.org/web/20170921064712/https://www.barcl...

Spain is also similar. We recently locked in a 2.65% for 5 years but 15 years around 3% was also available. That 15 year came with early repayment penalties though.

The big difference is that in most European countries I know of you are locked into that fixed rate for the duration of the loan and cannot re-finance or pay it off early without getting hit with huge penalty fee, essentially equal to the lost interest payments the bank would be missing out on. In the US you can pay off and/or renegotiate early without those penalties.

Paying off an extra 10% of the loan each year without penalty is usually possible in the Netherlands for a 30 year mortgage. I did it this year.

This sounds strange. Banks typically hedge their fixed rate loan portfolio because there aren't many equivalent long-dated fixed-rate funding sources available to them. If the US market is such that borrowers can repay early or renegotiate long-dated fixed-rate mortgages without penalties, the banks are practically guaranteed significant losses when fixed-rates decline. Do US banks just charge higher spreads than European ones to compensate for this? That sounds undesirable, similar to tax loopholes: everyone pays more to compensate the enlightened few that actually take advantage of something that _everyone_ would want to do.

The US mortgage market is essentially backstopped by the US government. Banks can sell the fixed rate mortgages to a government backed bank at a guaranteed rate and so don't have to hold the interest rate risk on their books. The US government (both parties) has long believed that home ownership is important and have a lot of policies to encourage it, this is one of them.

You can repay early in the Netherlands as well. A friend of mine works for a major bank to hedge the risk of their mortgage portfolio. He mentioned once that the biggest risk for Dutch banks is not the risk of default, but risk of early repayment. This always surprised foreign investors when they did due diligence to invest in Dutch mortgages.

There are ways they use to hedge for this risk. I don't know if this is desirable, but that is probably the case in the US as well.

Not true, depends on European bank. I did pay my mortgage which was originally 25 years IIRC in Czech republic fully, one time payment, with no extra fees associated to this. Whether bank was happy or wanted me to keep paying all those years is another story, but their contract specifically allowed it.

In my French mortgage, I have 25 year fixed part, no point paying down that one earlier since the fee would be the sum of all the fixed interest for 25 years (what you wrote). Then the other part is calculated every 3 months from EURIBOR (not that great now, just like elsewhere). This one I can pay partially or fully anytime without any fees.

My Swiss mortgage is completely different and unique beast (also split in 2 parts, one fixed 1 variable from Saron rate), nothing you can see anywhere else in the world IIRC. 20% cash downpayment as usually, then in next 15 years I need to pay off another 15% of the property, and rest is just interest payments. We'll never fully own the property, and its very disadvantageous tax-wise to own it(so nobody here does it if they can avoid it). Swiss invented an additional property tax (Imputed rental value) that is calculated from hypothetical rent you could extract from given property, and you are taxed also from this theoretical income, even if its your primary residence.

Great depression is why.

Before real estate loan terms were exploitive interest only loans that the bank could call in any time. Worse they could demand payment in a fixed amount of gold. And when they foreclosed the owner lost his entire collateral.

First three years of the great depression was an orgy of foreclosures driven by bankers greed and panic. FDR closed the banks, seized all gold except for personal jewelry. The new deal introduced 30 year fixed rate mortgages to make sure the banks couldn't do that again. Loosening rules led to the 2008 crisis where they did it again. But the rules did still protect most.

Yes you can refinance at a lower rate if/when rates drop.

You have to pay some money to do so, but it's insignificant compared to the cost of interest if it's over a percent lower or so.

There are usually no pre-payment penalties.

I imagine a lot of people buying houses right now are counting on mortgage rates dropping in the future.

*so long as your house appraised for high enough value to meet the debt to equity ratio. So if mortgage rates go down, but your home price crashes 10%, you’ll likely only be able to refinance by significantly paying down the mortgage balance.

Yes, you can refinance any time with nearly no cost. During covid years, a lot of homeowners refinanced multiple times, each time with a small bonus (under 3K) for refinancing.

What people don't understand though is interest payments are front-loaded. Most of the early payments will be almost all interest, and with frequent refinances most of them are paying interest all time time, extending mortgage by a few years. Most only think of cash flow and the payments appear lower, if you don't think about those extra years.

https://thepillmethod.com/help-us-celebrate-the-80th-anniver...

you can just pay off the loan faster and put whatever interest cut you got towards the principal?

If you're fixed at 2 or 3%, why bother?

You can make a better return putting your money elsewhere.

a common mantra, but almost nobody actually does it

Also, the return is guaranteed in the case of mortgage repayment.

The returns from investment are estimated based on historical performance. You can lose money investing, not so paying off a mortgage early.

At the very least, during periods when interest rates are significantly above your mortgage rate, such as now, you should put it in a money market account instead of in your mortgage. It's the same amount of risk, but it's liquid. Really, you could do a long term Treasury bond for the same reasoning (same risk, same liquidity).

   you can just pay off the loan faster

In the US mortgage market, this is called curtailment. For example, if you make one extra payment per year, you will shorten a 30 year fixed rate mortgage by about 4.5 years. Also, for most US mortgages, you are allowed to prepay 100% with no penalty. This allows for refinancing.

What I do not understand: Why don't more countries do this? Have large gov't financing companies that guarantee certain fixed rate mortgages? Overall, it is a huge win for the middle class home owner in the US.

>For example, if you make one extra payment per year, you will shorten a 30 year fixed rate mortgage by about 4.5 years.

This doesn't sound right. If I make 5 extra payments (either in 1 year or over 4 years), the mortgage will be shortened by 5 x 4.5 years = 22 years. I'm sure everyone would do this, 5 extra payments is super easy!

You misunderstood my original post. One extra payment per years means 13 mortgage payments, instead of 12. (Almost all US mortgages require monthly payments.) To be clear: This extra payment is strictly optional, but it used to demonstrate how curtailment can meaningfully reduce the life of your loan and the amount of interest paid.

> What people don't understand though is interest payments are front-loaded.

This is completely wrong. In the U.S. at least, interest is calculated based on the remaining balance.

It is not "front loaded" at all. It's just that your balance is highest at the start of the term.

A borrower can pay down extra principal at any time if they so choose and interest (absolute, not rate) will go down the next month.

A perspective from an American:

- Yes, typically we can refinance whenever we like, _but_ it extends the mortgage for a 30 year term, along with additional direct immediate costs (plus human inertia). Unless interest rates were alarmingly high for your last go-round (ehem), you're directly incentivized and indirectly likely to not do so.

- I own properties in Canada (yay Commonwealth!). The notion of a 30-year fixed does not exist. One can get a 25-year amortization, but typically only with a 5-10 year guarantee for a fixed rate.

- As an American, Canadians are insane for buying into this system. Our system is so much more favorable to anyone with good enough credit to be approved for a loan it's literal comedy. Also our standards for approving someone for a loan seem to be lower (that said, I had no credit history in Canada when I started this adventure, so perhaps residents get a better deal).

- As a property investor, I'm happy to control for the cash I sink into my investments in interest versus the returns I get from rental revenue. Combining that with exchange rates and US interest rates versus Canadian, I <3 Canada.

- Fully variable interest mortgages are for suckers (and in that regard, I do have some regrets).

(bias: I <3 Canada regardless -- I'd live in Whistler, BC if circumstances allowed)

>>but_ it extends the mortgage for a 30 years

How come? Here in UK you just remortgage for the remaining term of your mortgage, if you have 14 years left you just remortgage for 14 years. Is that something that you have to to do in America, or just what most people choose to do?

In the US lenders generally only offer a few options for the lengths of fixed rate mortgages, with 15 and 30 years probably being the most common.

There is generally no prepayment penalty here, so if you want some length that isn't one of the standard ones you can just get a longer one and then pay some extra principle each month to pay it off over the timeframe you wanted.

It is amazing how much less time it takes to pay off a 30 year mortgage if you increase the payments 10%. The first good many years are paying mostly just the interest.

In this case you would likely do a 15 year term loan. The previous comment is misleading or incorrect in stating that you have to do a new 30 year loan always when refinancing.

When I refinanced they let me pick a term of a 27 years, of course it was at the 30 year rate. There is no advantage to doing this versus just automatically overpaying the mortgage every month to tune in the target payoff date.

A 15-year loan is a standard term, with rates that are usually different from a 30-year.

When you refinance, it’s just a new mortgage. You can do it purely for rate, or you can do a cash out refi (refinance at market rate for your house, pocket the equity you’ve built up as cash, but now your loan is bigger). The loan terms are like a regular mortgage, because they basically are. The originator of the mortgage often sells it on the secondary market.

Well yes, obviously - it's the same here. I just read what OP said as a requirement that you have to extend your mortgage by another 30 years. Here you just get a now mortgage of any length you want - if you fancy 9 years or 12 or 38 that's fine.

Extending isn't the right word. You're applying for a completely new one, often with a different bank. The common options are 15 year and 30 year terms. The new one pays off the old one and if it's structured you can even get extra cash out, though that may increase your interest rate.

These 30 year terms and favorable terms like no prepayment penalty or balloon payments are a result of government regulations and subsidies that were created after the Great Depression in the 1930s and were designed to 1.) prevent people from losing homes when interest rates increase, 2.) encourage homeownership by making mortgages easier and more rational for buyers.

There are other government regulations and subsidies that encourages and compensates lenders for participating in this market. The government gives access to low interest loans through the federal reserve banking system, created private entities (such as Freddie Mae) that purchase conforming mortgage back securities and requires buyers to pay for loan default insurance until they have a specific amount of equity in the home (which compensates the lender in the event of a foreclosure).

These policies and subsidies are the only reason this market exists and is able to be so highly beneficial for buyers and allow for such a long-term risk taking.

No, this poster is not correct. You CAN refinance for another 30-year note, or a 15-year note, or a 10-year note, or whatever the bank will let you refinance for and you're willing to sign up for.

All you're doing is taking out another loan and using that loan to pay off the original loan. So whatever terms you can get from the bank are fair game.

Also, there's nothing stopping you from paying the loan off early.

Refinancing has a significant cost though. The various fees and transaction costs add up to $10-20k+ in my experience. Is not at all free, unless the savings from the difference in interest rate exceeds the transaction cost.

Interesting. Here in UK there are usually literally no costs to remortgaging, we've remortgaged couple years ago and only cost was paying £500 for a solicitor to look throught he paperwork(which we convinced the bank to pay for in the end, so it cost us nothing overall).

A refi over here is treated cost-wise exactly like taking out a new mortgage, which you then use to pay off the first mortgage.

Same here. There are no fees(usually) for taking a new mortgage either. A bank might charge you something for making the transfer, but it's like £50, completely insignificant.

> As an American, Canadians are insane for buying into this system.

In theory, there’s nothing wrong with some/tons of uncertainty, as long as people don’t play along and don’t overpay while hoping for the best. Buuuuut people are stupid and do just that.

As an American, Canadians are insane for buying into this system.

As a European, the US mortgage system combined with very generous tax-deductible interest rules, is probably one of the most generous and property owner friendly system around. As a property (and mortgage) owner myself, I'm very envious of it.

That being said, had I been a renter in the US I would probably be very upset about how much tax payer money is going to support home owners.

    very generous tax-deductible interest rules

There is a lot of economic research around the second order impact of these tax deductions. Do they, in fact, increase the cost of homes? There is _some_ evidence that says yes, so the tax deduction is offset by higher purchase price.

The standard deduction is now taken close to 90% of the time in the US. Most people no longer benefit from the mortgage interest on their taxes.

The standard deduction has been significantly increased in the US recently. Mortgage interest is often not worth itemizing unless you're in a high cost of living area or have a big house elsewhere.

30 year fixed and 15 year fixed are very common. There is also 5 year fixed then variable, but those burnt a lot of people in 2008 so they have a bit of a bad reputation with some. There are generally no early payment penalties. Refinancing is easy and considered worthwhile whenever the rates improve by 0.5 percent or more.

It's easy to refinance at a lower rate. You essentially just pay for and qualify for a new mortgage, the fact that it's a refinance and not a new house you're buying is mostly immaterial.

So you're out a few grand in fees, and if you somehow become less creditworthy it may not work.

When interest rates first spiked it seems like the prevailing wisdom was that they wouldn't stay high for long, so buyers should just swallow the higher monthly payment "for a year or two" then plan to refi.

I don't hear that advice much anymore!

Yes, you can refinance to a lower rate. It’s easy and people do it all the time. There is some cost overhead so you don’t do it everytime rates drop a tiny bit. But if they drop more than 1% it’s easily worth it.

> Yes, you can refinance to a lower rate. It’s easy and people do it all the time.

It's almost unbelievable how easy it can be.

I got a call from the company that held my mortgage asking why I hadn't responded to the refinance offer they had sent me. I told them I wasn't aware of any such offer. They said they had FedExed an offer to me a couple weeks earlier.

I went and looked on the front porch, and sure enough there was a thick FedEx package there. I hadn't noticed that because I used the back door as my main entry/exit door.

Inside was all the paperwork, prefilled, for a refinance with instructions that said all I had to do to accept was call them and tell them, and then they would send a notary to meet me at home or at my office with a copy of the documents for me to sign.

If rates drop, you can refinance immediately, assuming your credit score/income are still sufficient enough to qualify for a new mortgage.

Fixed rate is really common in Europe, definitely not a US thing.

you can refinance when rates are lower. The question is when they will be.

And pay significant early termination fees.

Mortgages in the us don’t typically have early prepayment penalties of any kind.

Unless prices drop below your mortgage balance.

Prices are not likely to crash with the conditions we have in place currently. Prices crashed in 2008 because there was 10 to 15-year-long bipartisan push that "everyone needs to be a homeowner." This let banks write adjustable-rate loans to people who arguably never should have been touching a mortgage given their financial situation. And when interest rates reset, enough people started defaulting that the whole system collapsed. And that's without getting into the funny business of securitizing those bad mortgages and using them as investment vehicles.

These days, mortgages are generally very well-underwritten and only given to people who can afford to pay. High interest rates are going to put a cap on prices, but where we're at now is a supply crunch. 2008 wiped out the homebuilding industry and now there's a supply crunch with not enough houses for the amount of people who want to buy, which is driving up prices.

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