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Jun 22

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Goodbye 30 year mortgages…

Well, if you read the media it’s, once again, the “end of the world as we know it”. Yes, the option to be the bank’s tenant for 30 years is going the way of the dodo.

Such news, seems to me, is only designed to generate headlines and sell newspapers. Did life end when 40 year mortgaged went away? What about a decade ago when neither option ever really existed in the first place?

I never understood why anyone would actually want a 30 year mortgage to begin with. I never have, but that’s because I actually want to own something before I die I suppose.

Actually, I should come clean, I do own one 30 year mortgage. It wasn’t my idea, the bank drew up the papers that way to begin with, and it would have delayed things to reprint all the paperwork again. My banker thought he was doing me a favour of course. It was no problem to adjust the payments as if it were actually a 20 year bi-weekly rapid mortgage (the mortgage I personally think is best) and, if cash flow became tight, I could always lower the payments up to a 30 year monthly mortgage. This is something you can’t do if you don’t have the 30 year mortgage to begin with…of course, the penalties for breaking the mortgage earlier are higher, but he glossed over that point (and I didn’t really care because it was a short term mortgage anyway). So, as an investor, I suppose there was one reason to like the term…

Personally, I think if the only way to make the numbers work on an investment is by getting a 30 year mortgage, the investment is too risky. There are plenty of properties out there that you can find that should cash flow at 20 years. If you can’t find them, wait. You are committing to paying that rate for the next 30 years, what do you do if you only locked in for 1 year and need to remortgage at 25 now? What happens when (note: I didn’t say if, I said when) the rates increase? If you can barely make money at these interest rates, then you’ll probably lose the property to foreclosure long before the 30 years expires.

As for homeowners, people will still buy houses, and those who can’t afford to rent from the bank, will rent from people like me. Maybe people need to wake up and realize that they can’t have everything they want when they want it. I’m not a big fan of trying to legislate stupidity, but people really shouldn’t be buying places they can barely afford.

Maybe if we asked people why they are buying a place worth $100,000, but are willing to pay $500,000 or even more for it? Compound interest is a deadly tool. Not only that, but they also pay for improvements, maintenance, taxes, etc. Seems rather silly.

Some people despise renting, but in reality they rent from the banks their entire lives. Their biggest “investment” has a negative return if they factored in their true costs in most cases.

Lesson: There is no reason to morn the loss of the 30 year mortgage if you are either a homeowner or an investor. If you knew what you were doing to begin with, you’d never have touched it in the first place.

Permanent link to this article: http://www.easysafemoney.com/goodbye-30-year-mortgages/

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