6 ms·

It's only toxic for people who don't do anything with it. Even in Australia where real estate prices are insane the average 30 year loan is paid off in 14 years

by quitit 5y ago

It's only toxic for people who don't do anything with it. Even in Australia where real estate prices are insane the average 30 year loan is paid off in 14 years (note this is longer than earlier times.) Also the ability to refinance the loan can allow a person to take advantage of equity to either purchase additional properties or reduce their monthly dues. If the property is rented this can be the difference between the property requiring funds every month to one that makes the owner money every month - at which point it really doesn't matter what the duration of the loan is, because it's now producing income.

User23 5y ago
Why would I want to sell investments that are returning an average of 7+% a year to pay off a mortgage that I'm paying 2.9% on? The bank is welcome to let me use their money. Even if you don't have any investments, assuming you're under 50 you're still better off paying the minimum on your mortgage and investing the surplus rather than extinguishing a 2.9% liability.
- globular-toast 5y ago
  Because "investments" could stop returning 7% at any time, mortgage interest rates could rise at any time and you can live in a house, you can't live in stocks and shares.
  - sokoloff 5y ago
    The overwhelming majority of mortgages in the US are fixed-rate products (at this time of low interest rates). Interest rates can do whatever they want from here and it won't affect the typical existing mortgage. (If they go high enough, a legacy low-rate mortgage becomes even more valuable to continue to hold.)
    - globular-toast 5y ago
      How long are they fixed for? I don't know anyone to be on longer than a 3 year fix in the UK.
      - sokoloff 5y ago
        In the US, fixed rate mortgages are fixed for the entire term of the mortage. Anything else is called an adjustable rate mortgage (ARM) and those are often 3/1, 5/1, 7/1, or 10/1 (referring to the length, in years, of the original rate and then the period, in years, of each subsequent adjustment period [note that if you see a /6 mortgage, that's adjustable every 6 months after the initial period, not every 6 years]). It used to be that ARMs would have a "teaser" rate for that first period, which made them make sense to take out for some circumstances. Now, fixed rates dominate because the ARM rates aren't much lower than the fixed rates.
  - quitit 5y ago
    I agree if one chooses to invest in riskier investments, but it's straight forward to invest in financial products that provide a rate that move in lock-step with home loan interest rates. These products are lower-earners, but there is limited exposure to risk.
chiefalchemist 5y ago
> It's only toxic for people who don't do anything with it. But that's the point, isn't it? If the rare few benefit, and the vast majority do not, then the promise isn't a promise. It's a lie. Put another way, the system shouldn't be arranged and aligned in such that - as cliche as it is - the rich get richer, and the rest suffer.
- quitit 5y ago
  The 30 year loan is not a "rich get richer" scheme. The 30 year loan is a tool to allow people with limited earning potential access to the property market, and this can open the door to passive income and generational wealth. A 30 year loan paid off over a 30 year period is a waste of the product - one is not supposed to set it and forget it, doing that optimises the lender's profit much like paying off a credit card at the minimum rate or never checking if one's internet/phone/utility plans have become more competitive (check those annually.) Here are typical ways that a 30 year loan is used to enhance a person's financial position: 1. If the property value has increased, the loan can be refinanced to extract this equity as cash for investments that outpace the mortgage rate. Thus a person is immediately earning passive income which can be used to reduce their mortgage or other regular expenses. 2. Competition between lenders produces competitive rates. One can take advantage of lower rates in order to either reduce their out-goings or pay off their loan sooner (thus reducing their interest.) 3. A person can take advantage of the rental market. For example a couple may rent a smaller property after their children leave the nest, while renting out their family home. The function here is that they can remortgage their property over another 30 year duration, thus they begin to earn income from the property rather than having the property cost them money. (The loan duration is less important when the property is earning you money.) A common mindset of people is that they don't want a mortgage hanging over their head they want to "own" the property and have no "debt" - but financially savvy people will utilise their properties for wealth generation by having "debt". This means if their property is paid off, they would still mortgage it to the bank in order to obtain funds which are used in higher-interest investments, producing a passive income. Note if you are in good standing, you can walk into a bank and take out a personal loan - then use that loan to procure an investment portfolio which earns more than the repayments. Yes you own the risk, but it's a method to obtain instant passive income, and it's not difficult to invest in solid earners (some banks will even have this as a product, although it tends to be less competitive.)

by quitit 5y ago

User23 5y ago

Why would I want to sell investments that are returning an average of 7+% a year to pay off a mortgage that I'm paying 2.9% on? The bank is welcome to let me use their money. Even if you don't have any investments, assuming you're under 50 you're still better off paying the minimum on your mortgage and investing the surplus rather than extinguishing a 2.9% liability.

globular-toast 5y ago
Because "investments" could stop returning 7% at any time, mortgage interest rates could rise at any time and you can live in a house, you can't live in stocks and shares.
- sokoloff 5y ago
  The overwhelming majority of mortgages in the US are fixed-rate products (at this time of low interest rates). Interest rates can do whatever they want from here and it won't affect the typical existing mortgage. (If they go high enough, a legacy low-rate mortgage becomes even more valuable to continue to hold.)
  - globular-toast 5y ago
    How long are they fixed for? I don't know anyone to be on longer than a 3 year fix in the UK.
    - sokoloff 5y ago
      In the US, fixed rate mortgages are fixed for the entire term of the mortage. Anything else is called an adjustable rate mortgage (ARM) and those are often 3/1, 5/1, 7/1, or 10/1 (referring to the length, in years, of the original rate and then the period, in years, of each subsequent adjustment period [note that if you see a /6 mortgage, that's adjustable every 6 months after the initial period, not every 6 years]). It used to be that ARMs would have a "teaser" rate for that first period, which made them make sense to take out for some circumstances. Now, fixed rates dominate because the ARM rates aren't much lower than the fixed rates.
- quitit 5y ago
  I agree if one chooses to invest in riskier investments, but it's straight forward to invest in financial products that provide a rate that move in lock-step with home loan interest rates. These products are lower-earners, but there is limited exposure to risk.

chiefalchemist 5y ago

> It's only toxic for people who don't do anything with it. But that's the point, isn't it? If the rare few benefit, and the vast majority do not, then the promise isn't a promise. It's a lie. Put another way, the system shouldn't be arranged and aligned in such that - as cliche as it is - the rich get richer, and the rest suffer.

quitit 5y ago
The 30 year loan is not a "rich get richer" scheme. The 30 year loan is a tool to allow people with limited earning potential access to the property market, and this can open the door to passive income and generational wealth. A 30 year loan paid off over a 30 year period is a waste of the product - one is not supposed to set it and forget it, doing that optimises the lender's profit much like paying off a credit card at the minimum rate or never checking if one's internet/phone/utility plans have become more competitive (check those annually.) Here are typical ways that a 30 year loan is used to enhance a person's financial position: 1. If the property value has increased, the loan can be refinanced to extract this equity as cash for investments that outpace the mortgage rate. Thus a person is immediately earning passive income which can be used to reduce their mortgage or other regular expenses. 2. Competition between lenders produces competitive rates. One can take advantage of lower rates in order to either reduce their out-goings or pay off their loan sooner (thus reducing their interest.) 3. A person can take advantage of the rental market. For example a couple may rent a smaller property after their children leave the nest, while renting out their family home. The function here is that they can remortgage their property over another 30 year duration, thus they begin to earn income from the property rather than having the property cost them money. (The loan duration is less important when the property is earning you money.) A common mindset of people is that they don't want a mortgage hanging over their head they want to "own" the property and have no "debt" - but financially savvy people will utilise their properties for wealth generation by having "debt". This means if their property is paid off, they would still mortgage it to the bank in order to obtain funds which are used in higher-interest investments, producing a passive income. Note if you are in good standing, you can walk into a bank and take out a personal loan - then use that loan to procure an investment portfolio which earns more than the repayments. Yes you own the risk, but it's a method to obtain instant passive income, and it's not difficult to invest in solid earners (some banks will even have this as a product, although it tends to be less competitive.)