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That’s the standard in the US. Current rates are about 2.75%, although they went below 2.5% for a bit earlier this year. Those rates are for 20% down, good cr

That’s the standard in the US. Current rates are about 2.75%, although they went below 2.5% for a bit earlier this year. Those rates are for 20% down, good credit primary residences purchases. Rates for investment or vacation properties are generally about 1-2 percentage points higher. Mortgage rates in the US are indirectly and directly subsidized by the government across a huge spectrum of programs- See FHA loans, VA loans, etc. However one of the biggest contributors to low 30 year prices are the government backed corporations like Fannie Mae and Freddie Mac that purchase mortgage debt and repackage it into mortgage backed securities. Way too much the go into here, but a lot of the 2008 financial crisis has its roots in the policies that created Fannie Mae and Freddy Mac. Regardless, they have proven a fairly effective way to keep mortgage rates low.

OJFord 5y ago
Interesting. Higher than here currently of course - I was recently quoted 1.16% for a five year fix - but I've never heard of being able to lock in something pretty reasonable for the full term/30y like that. But are lower shorter term fixes also available? Presumably the 30y fix is a pretty stable rate, and just acts as an upper bound? So why not go with anything available that's lower, with that as a worst case fallback that's unlikely to be materially different after x years?
- topkai22 5y ago
  Yes, you can get a shorter term loan and have a lower interest rate- 15 years is also reasonably common, and fixed rate products exist at 20 and 10 years respectively. Adjustable rate and 5/1 or 7/1 products exist as well, but they aren’t as popular or encouraged by regulators, as they played a role in the 2008 financial crisis. As to why go for a 30 year loan instead of a lower interest rate 15 year the answer is basically cash flow and opportunity cost. A 15 year loan may result in paying less interest, but the monthly interest + principal payments are more. Your average borrower will qualify for a larger 30 year loan because the analysis is based on their ability to afford the monthly payments based on their current income. Even people who can easily afford a 15 year loan will choose a 30 year because the 0.5-1% interest rate is lower than the expected returns of something like stocks, so it makes sense to stay leveraged. There are also tax benefits to paying interest (but not principal) on loans, but these are way less important since the trump tax reforms. And I just reread your question, and I think you are asking about 5/1 loans. The reason there is that a) interest rates so fluctuate, a lot- they were above 9% in 1991. With a 30 year, you can choose when you refinance (there is no penalty to paying off a home loan early in the US) whereas with a 5/1 you might find yourself getting forced into a higher interest rate- potentially much higher to the point it’s unaffordable. 5/1s also actually have a higher interest rate than 15 years currently, as they aren’t considered “conforming” to various US government programs.
  - ryandrake 5y ago
    > Even people who can easily afford a 15 year loan will choose a 30 year because the 0.5-1% interest rate is lower than the expected returns of something like stocks, so it makes sense to stay leveraged. There are also tax benefits to paying interest (but not principal) on loans, but these are way less important since the trump tax reforms. On the other hand, it probably reduces risk to take the 15 year loan if you can afford the payments, in order to more aggressively build home equity and shield yourself from a sudden shock/downturn. If rates shoot up after, say, 5 years (and home values drop 20%), someone who's made 5 years of payments on a 30 year loan will be way underwater, whereas someone who's made 5 years of payments on a 15 year loan still has positive equity.
    - Gh0stRAT 5y ago
      Homes are massive, illiquid assets with high transaction costs and (unless you have many of them) are poorly diversified. I'd even argue it makes more sense to look at a primary home as a forced savings plan rather than as an investment.
      - topkai22 5y ago
        I disagree. It’s too big a chunk of people’s net worth to not analyze like a financial investment, if only to make one stop and think about them opportunity cost of buying at various price points and how much you are really spending to consume living in a nicer house (because there is definitely a consumption angle.) A primary residence even makes a good component of diversified portfolio so long as it is not the sole or dominant aspect of that portfolio. I understand your point about it being a "forced savings plan", but with 5-10x leverage on most loans even a housing market that appreciates at inflation can provide significant returns (or losses) in the long run.
    - topkai22 5y ago
      Don’t discount how rare 20% price drops in housing are historically - a nationwide 20% price decline has only happened once since 1951 (where I could find statistics start) and even then would only have applied for purchases in a 1 year window. House prices are historically high across almost any metric you choose right now, so we could see another incident of that, but it’s also possible we could see real house prices depreciate with inflation while holding nominal value.

OJFord 5y ago

Interesting. Higher than here currently of course - I was recently quoted 1.16% for a five year fix - but I've never heard of being able to lock in something pretty reasonable for the full term/30y like that. But are lower shorter term fixes also available? Presumably the 30y fix is a pretty stable rate, and just acts as an upper bound? So why not go with anything available that's lower, with that as a worst case fallback that's unlikely to be materially different after x years?

topkai22 5y ago
Yes, you can get a shorter term loan and have a lower interest rate- 15 years is also reasonably common, and fixed rate products exist at 20 and 10 years respectively. Adjustable rate and 5/1 or 7/1 products exist as well, but they aren’t as popular or encouraged by regulators, as they played a role in the 2008 financial crisis. As to why go for a 30 year loan instead of a lower interest rate 15 year the answer is basically cash flow and opportunity cost. A 15 year loan may result in paying less interest, but the monthly interest + principal payments are more. Your average borrower will qualify for a larger 30 year loan because the analysis is based on their ability to afford the monthly payments based on their current income. Even people who can easily afford a 15 year loan will choose a 30 year because the 0.5-1% interest rate is lower than the expected returns of something like stocks, so it makes sense to stay leveraged. There are also tax benefits to paying interest (but not principal) on loans, but these are way less important since the trump tax reforms. And I just reread your question, and I think you are asking about 5/1 loans. The reason there is that a) interest rates so fluctuate, a lot- they were above 9% in 1991. With a 30 year, you can choose when you refinance (there is no penalty to paying off a home loan early in the US) whereas with a 5/1 you might find yourself getting forced into a higher interest rate- potentially much higher to the point it’s unaffordable. 5/1s also actually have a higher interest rate than 15 years currently, as they aren’t considered “conforming” to various US government programs.
- ryandrake 5y ago
  > Even people who can easily afford a 15 year loan will choose a 30 year because the 0.5-1% interest rate is lower than the expected returns of something like stocks, so it makes sense to stay leveraged. There are also tax benefits to paying interest (but not principal) on loans, but these are way less important since the trump tax reforms. On the other hand, it probably reduces risk to take the 15 year loan if you can afford the payments, in order to more aggressively build home equity and shield yourself from a sudden shock/downturn. If rates shoot up after, say, 5 years (and home values drop 20%), someone who's made 5 years of payments on a 30 year loan will be way underwater, whereas someone who's made 5 years of payments on a 15 year loan still has positive equity.
  - Gh0stRAT 5y ago
    Homes are massive, illiquid assets with high transaction costs and (unless you have many of them) are poorly diversified. I'd even argue it makes more sense to look at a primary home as a forced savings plan rather than as an investment.
    - topkai22 5y ago
      I disagree. It’s too big a chunk of people’s net worth to not analyze like a financial investment, if only to make one stop and think about them opportunity cost of buying at various price points and how much you are really spending to consume living in a nicer house (because there is definitely a consumption angle.) A primary residence even makes a good component of diversified portfolio so long as it is not the sole or dominant aspect of that portfolio. I understand your point about it being a "forced savings plan", but with 5-10x leverage on most loans even a housing market that appreciates at inflation can provide significant returns (or losses) in the long run.
  - topkai22 5y ago
    Don’t discount how rare 20% price drops in housing are historically - a nationwide 20% price decline has only happened once since 1951 (where I could find statistics start) and even then would only have applied for purchases in a 1 year window. House prices are historically high across almost any metric you choose right now, so we could see another incident of that, but it’s also possible we could see real house prices depreciate with inflation while holding nominal value.