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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 respec

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
I didn't mean shorter term loan, just shorter fix. I think the answer is it just works surprisingly differently here (UK) vs. there (US). Here a normal thing to do is something like 30 year loan on a 1/2/3/5 year fixed rate, after which it would be some relatively horrendous variable rate [^] - but you don't pay that, you just switch to a new fixed rate at the same or other provider (technically remortgaging). So you're leveraged for the full 30 (or whatever) year term regardless, but you make some decision about how 'good' you think the rates are at the moment and what direction they're moving in (and pretend your adversary isn't a massive bank with a lot more information and smart people behind it) and fix for accordingly many years (more costing a slightly worse rate of course). [^] - you could also just choose a variable rate to begin with, but that's not really relevant here, I just mean I think typically the rate you'd drop to after the end of the fixed rate would be worse than that, as in you're going to pay more spread over whatever it's tracking.

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

I didn't mean shorter term loan, just shorter fix. I think the answer is it just works surprisingly differently here (UK) vs. there (US). Here a normal thing to do is something like 30 year loan on a 1/2/3/5 year fixed rate, after which it would be some relatively horrendous variable rate [^] - but you don't pay that, you just switch to a new fixed rate at the same or other provider (technically remortgaging). So you're leveraged for the full 30 (or whatever) year term regardless, but you make some decision about how 'good' you think the rates are at the moment and what direction they're moving in (and pretend your adversary isn't a massive bank with a lot more information and smart people behind it) and fix for accordingly many years (more costing a slightly worse rate of course). [^] - you could also just choose a variable rate to begin with, but that's not really relevant here, I just mean I think typically the rate you'd drop to after the end of the fixed rate would be worse than that, as in you're going to pay more spread over whatever it's tracking.