Who stays in a house for thirty years? Your grandparents might have done exactly that. It’s possible your parents might be in their home still after fifteen or so years, but they may be planning to sell it and move to a retirement home in the near future – once the housing market improves, of course. Our current generation is still treading water in the housing market.
The statistics show just how marginal things are for the individuals categorized as Generation X. Only slightly more than half of those in their thirties and forties hold a mortgage or own a home outright. Around 43 percent of this generation rents homes according to statistics published by the University of Washington. With this same generation expected to change careers – not just jobs – up to eight times over their lifetime, is it any wonder that we aren’t rushing out to tie ourselves to thirty-year mortgages?
Why a 30-Year Mortgage?
There is no doubt the classic 30-year mortgage still holds tremendous appeal. By almost all accords it is considered the safest loan available today. While designer loans may have spiraled out of control during the housing bubble prior to 2008, 30-year mortgages continue to plod along with the same steady determination that they have for generations.
With a 30-year mortgage loan you may not pay the absolutely lowest interest rate, but you set your payments at a set place and lock them in. You’ll pay the same amount for your mortgage now as you will in twenty years. After riding the wave of foreclosures and balloon payments, this sort of payment structure holds a certain appeal. But is it really necessary?
Selling a Home
There’s no doubt that we’re not in the ideal conditions to sell, although the housing market is returning in certain areas of the country where demand is still strong. The trouble, however, for those who took on a thirty-year loan is that by selling your home after two or three years in our current market you’ll have made only a moderate amount of money from appreciation. When you tack on the 6 to 7 percent in realtor fees you’d be expected to pay when you pick up and move to your next job, you’re suddenly looking at a loss on the property rather than a gain.
Unless real estate values come soaring back to the heights they were enjoying prior to 2008, it’s unlikely your home will be appreciating enough to make a profit selling after three years or less. In fact, you may be taking a loss – especially when you factor in the cost of maintenance and upkeep that are required of homeowners.
Thinking of mobility issues combined with this new sober reality of “wasted” investments in a home, it’s no wonder so many of the young and middle-aged families are living in rentals rather than bothering with the trouble buying can bring.
Part of the trouble, however, is the 30-year mortgage. While it’s a standard, it’s much like a hard backed novel – wonderful to have available, but perhaps a bit outdated when compared to the more mobile ebook.
The New Mortgage Market
Individuals looking to buy a home in our current market should be looking for loans that offer both security and some flexibility for investment.
Homes are still a very wise investment – either as rentals or family properties. The trick is finding a loan and down payment package that turns the purchase into an actual profit center rather than a lot of money “saved” and then lost at closing.
An easy solution is to simply take the fixed interest terms of the 30-year loan and shorten the term of the loan. A 15-year loan, for example, will have a lower amount of interest than the comparable 30-year limit. It will also include payments that are higher, but not doubled. By cutting the loan in half, you’re severely reducing the amount of interest that you’re paying on your current loan, which keeps payments reasonable close to the 30-year estimate.
For example, with a $200,000 15-year mortgage with a fixed rate of 4 percent generates a mortgage payment of $1479. That same $200,000 split over 30-years with a fixed rate of 4.25 percent generates a mortgage of $983. $500 is a lot of money per month, but in the first three years of the loan you’d have paid $32,000 in equity on the property with the 15-year loan, even if the property never appreciated. With the 30-year loan, you’d have accumulated just under $11,000.
Should you sell the property with the help of a realtor, the seven percent fee charged for the home – if sold at $200,000 – would come to $14,000. Should you sell after only three years – as many people do – you’re left $3,000 in the red. So much for a wise investment!