Author Topic: 30 year mortgages  (Read 9288 times)

scottish

  • Handlebar Stache
  • *****
  • Posts: 1770
  • Location: Ottawa
30 year mortgages
« on: January 21, 2015, 05:38:53 PM »
On today's blog post, some of the commenters were writing about 30 years mortgages in the U.S.

How do these work?   

Are you now committed to the mortgage for the next 30 years?     Or can pay it off without penalty?

And then I think Rebelspy mentioned on another thread that the mortgage holder cannot foreclose on you if the mortgage is underwater.   Furthermore, if you walk away from the property, the only recourse the mortgage holder has is to foreclose - he cannot go after you personally beyond the house.

This seems like a good deal for the owner, compared to Canada.     In Canada, I believe that even if the mortgage holder forecloses on your house, he can still come after you personally for any remaining balance on the loan.

iamlindoro

  • Handlebar Stache
  • *****
  • Posts: 1520
    • The Earth Awaits
Re: 30 year mortgages
« Reply #1 on: January 21, 2015, 05:43:52 PM »
Prepayment penalty, or lack thereof, is determined by your loan documents.  It can be either way but commonly tends to not have a prepayment penalty.

Whether the mortgage company can go after you for your mortgage, and any difference when underwater, varies from state to state.  Some states are "recourse" states, where the mortgage company can force you to pay the full amount of the mortgage, and some are "non-recourse," in which case the worst they can do to you in foreclose and record it on your credit. 

OneCoolCat

  • Bristles
  • ***
  • Posts: 442
  • Age: 33
  • Location: SoFla
Re: 30 year mortgages
« Reply #2 on: January 21, 2015, 09:34:42 PM »
On today's blog post, some of the commenters were writing about 30 years mortgages in the U.S.

How do these work?   

Are you now committed to the mortgage for the next 30 years?     Or can pay it off without penalty?

And then I think Rebelspy mentioned on another thread that the mortgage holder cannot foreclose on you if the mortgage is underwater.   Furthermore, if you walk away from the property, the only recourse the mortgage holder has is to foreclose - he cannot go after you personally beyond the house.

This seems like a good deal for the owner, compared to Canada.     In Canada, I believe that even if the mortgage holder forecloses on your house, he can still come after you personally for any remaining balance on the loan.

You can 100% get foreclosed on even if underwater and a deficiency can be sought, but rarely is because people who don't pay their mortgages generally don't have money they can collect on. 

jackiechiles2

  • Stubble
  • **
  • Posts: 124
Re: 30 year mortgages
« Reply #3 on: January 21, 2015, 10:22:39 PM »
Japan has 100 year mortgages.  Not really sure how that works.

MDM

  • Senior Mustachian
  • ********
  • Posts: 10250
Re: 30 year mortgages
« Reply #4 on: January 21, 2015, 10:36:17 PM »
Japan has 100 year mortgages.  Not really sure how that works.
Pretty much the same as a 30 year, or 20 year, or 15 year, etc.  You pay a lower monthly amount, but a lot more in interest....

E.g., see http://www.sciencedirect.com/science/article/pii/1061951895900047

sabertooth3

  • Stubble
  • **
  • Posts: 109
  • Location: MD
Re: 30 year mortgages
« Reply #5 on: January 22, 2015, 07:23:12 AM »
On today's blog post, some of the commenters were writing about 30 years mortgages in the U.S.

How do these work?   

Typically 30 year mortgages are set at a fixed interest rate that remains fixed throughout the life of the loan. or example, if you buy a $250,000 house with a 20% down payment, you'd have a mortgage of $200,000. The lender gives you options for paying off your loan; one of those options is the 30-year fixed rate.

Rates typically don't vary much between lenders, although that can depend on credit union membership and other factors I can't think of right now. Currently the 30-year rate is 3.75% for typical purchases, and up to 3.875% for "Larger loan amounts in eligible areas". These areas are usually high COL areas; in the US that would include New York City, San Francisco, Washington DC, and other major city areas and their surrounding suburbs.

Are you now committed to the mortgage for the next 30 years?     Or can pay it off without penalty?

You can refinance your mortgage if interest rates drop, but yes- you do need to pay your mortgage every month. On prepayment penalties, iamlindoro is correct. Typically there aren't, but lenders are allowed to charge prepay penalties if they want.

And then I think Rebelspy mentioned on another thread that the mortgage holder cannot foreclose on you if the mortgage is underwater.   Furthermore, if you walk away from the property, the only recourse the mortgage holder has is to foreclose - he cannot go after you personally beyond the house.

I don't know about this, but I'm inclined to believe OneCoolCat.

In my opinion, the main reason why 30 year mortgages are so popular in the US is because mortgage interest is tax-deductible(up to a certain income level). The limit is pretty generous, so it can knock off quite a lot of taxable income from your taxes.

Hope this helps!

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28295
  • Age: -999
  • Location: Seattle, WA
Re: 30 year mortgages
« Reply #6 on: January 22, 2015, 11:41:17 AM »
A 30-year fixed mortgage in the US is exactly what it sounds like - you get an interest rate, it's fixed for 30 years, amortized over 30 years, and you pay it off.

Most do not have prepayment penalties, and you can pay it off (or refinance) at any time.  The ability for you to lower the mortgage rate that way, while they can't up it, is a big benefit to owning mortgages here in the US.

You can 100% get foreclosed on even if underwater

Uh, no.

If you are paying your mortgage payment, they can't foreclose.  It doesn't matter if your house is worth $1.  And why would they foreclose if you're paying, so they can own an asset worth less?

Your mortgage document outlines the terms of repayment, and their recourses for violations of the note.  Foreclosing based on the current value of the home when you are current is not one of them.

After they foreclose whether or not they can go after you for a deficiency judgement is another matter, and it varies by state law.  Here in NV they can sue you to collect the difference, but some states they can't, the house is the only recourse.  There are also non-recourse loans that are not tied to you personally, but that's not typical for a conventional mortgage.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

CanuckExpat

  • Magnum Stache
  • ******
  • Posts: 3004
  • Age: 37
  • Location: North Carolina
    • Freedom35
Re: 30 year mortgages
« Reply #7 on: January 22, 2015, 02:00:11 PM »
There's a bit of the historical background on these mortgages here: http://www.marketplace.org/topics/sustainability/who-thought-30-year-mortgages-were-good-thing

(given the title, they may or may not be a bit slanted, but it's a good quick read)

forummm

  • Walrus Stache
  • *******
  • Posts: 7389
  • Senior Mustachian
Re: 30 year mortgages
« Reply #8 on: January 22, 2015, 02:00:23 PM »

You can 100% get foreclosed on even if underwater

Uh, no.

If you are paying your mortgage payment, they can't foreclose.  It doesn't matter if your house is worth $1.  And why would they foreclose if you're paying, so they can own an asset worth less?


Yeah. It would be an even worse decision for the lender than this because a foreclosed house will sell for even less than it's worth when occupied by the owner. And then the lender has to carry that asset for however long it takes to close on the sale--not getting income, but still having to pay taxes and maintenance expenses. Lenders want you to pay them. They don't want your house.

FarmerPete

  • Bristles
  • ***
  • Posts: 346
Re: 30 year mortgages
« Reply #9 on: January 22, 2015, 09:17:32 PM »
A lot of banks are pushing 40 year mortgages.  Luckily, interest only mortgages (fairly common pre-2008 crash) seem to be fairly dead now.  Ultimately, banks want you to borrow as much money as you can.  They are willing to extend the terms or rewrite the mortgage to allow you to borrow more any way they can legally.

tna

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: 30 year mortgages
« Reply #10 on: January 23, 2015, 10:30:34 AM »
Japan has 100 year mortgages.  Not really sure how that works.

Swede here. We don't need to pay down our mortgage at all. The average repayment plan is 140 years but you really don't need to pay it back. The only thing you need to be able to pay is the interest. Oh, did I mention we probably have an enormous housing bubble?

Mississippi Mudstache

  • Handlebar Stache
  • *****
  • Posts: 2160
  • Age: 36
  • Location: Danielsville, GA
    • A Riving Home - Ramblings of a Recusant Woodworker
Re: 30 year mortgages
« Reply #11 on: January 23, 2015, 01:32:15 PM »
I actually seem to remember reading that almost all mortgages were interest-only, prior to ca. 1950. Same as a bond. The amortization schedule is what helped popularize them. (Take this with a grain of salt, I'm channeling an investment book that I read about 5 years ago. Perhaps someone else could confirm/deny)

MrMoogle

  • Handlebar Stache
  • *****
  • Posts: 1128
  • Age: 35
  • Location: Huntsville, AL
Re: 30 year mortgages
« Reply #12 on: January 23, 2015, 05:19:25 PM »
Japan has 100 year mortgages.  Not really sure how that works.

So non-Japanese aren't allowed to own property in Japan, so they do a 100 year lease that basically means, "for the rest of my life" to get around this.

scottish

  • Handlebar Stache
  • *****
  • Posts: 1770
  • Location: Ottawa
Re: 30 year mortgages
« Reply #13 on: January 23, 2015, 08:35:39 PM »
Thank you all for the information.   It sounds like the mortgage business is tilted a bit more in favour of the lenders in Canada than in the U.S.

One of the big differences is prepayment penalties.   These are the norm in Canada rather than the exception.

On taxes, mortgage interest is not tax deductible in Canada.   Capital gains on your home (so called principal residence) are not taxable however.    I think in the U.S. you have to pay capital gains tax when you sell if you do not use the proceeds to buy another residence.   Correct?

In Canada we have a government organization called the CMHC which provides insurance to the *lender* against default.    The purchaser has to pay the insurance premiums.   And the insurance is mandatory if you don't have at least a 20% down payment.   I don't think this exists in the U.S., or at least not as a government backed insurance plan.

And as several people pointed out, in some states, you can default on your mortgage, walk away from your house and, while your credit rating will suffer, you can wash your hands of it.   

The Bank of Canada dropped their overnight interest rate this week and I'm curious to see if the banks drop their mortgage rates or not.

Dimitri

  • Guest
Re: 30 year mortgages
« Reply #14 on: January 23, 2015, 08:59:36 PM »
I actually seem to remember reading that almost all mortgages were interest-only, prior to ca. 1950. Same as a bond. The amortization schedule is what helped popularize them. (Take this with a grain of salt, I'm channeling an investment book that I read about 5 years ago. Perhaps someone else could confirm/deny)

If memory serves correct, mortgages used to be CAM typically based on a 20 year term due in 5 - 50% down.  After WWII loans started to be CPM with a longer term and lower down payments (i.e. 20% eventually getting down to 3%).  And then came the NINJA I/O loans. 

PEIslander

  • Stubble
  • **
  • Posts: 168
  • Age: 59
  • Location: Prince Edward Island, Canada
Re: 30 year mortgages
« Reply #15 on: January 24, 2015, 04:43:05 AM »
Thank you all for the information.   It sounds like the mortgage business is tilted a bit more in favour of the lenders in Canada than in the U.S.

One of the big differences is prepayment penalties.   These are the norm in Canada rather than the exception.

On taxes, mortgage interest is not tax deductible in Canada.   Capital gains on your home (so called principal residence) are not taxable however.    I think in the U.S. you have to pay capital gains tax when you sell if you do not use the proceeds to buy another residence.   Correct?

In Canada we have a government organization called the CMHC which provides insurance to the *lender* against default.    The purchaser has to pay the insurance premiums.   And the insurance is mandatory if you don't have at least a 20% down payment.   I don't think this exists in the U.S., or at least not as a government backed insurance plan.

The other big difference between our Canadian mortgages vs. American ones relates to the term of the mortgage. In the US you get, say, a 25-year mortgage were the amortization & mortgage contract are for 25 years. Payments are made to the lender for 25 years at an interest rate that extends for the 25 years. Here in Canada a 25-year mortgage is different. The 25 years is just the amortization schedule and not the length of the mortgage contract. A fairly typical mortgage contract here will be five years --- with a 25 year amortization. In that case we pay the lender payments for just five years at a interest rate that is based on five years. (The amortization schedule is based on that interest rate for the 25 years). At the end of five years we get a new mortgage -- usually with the same lender but not necessarily -- at a new interest rate. We can get either a variable-rate or fixed-rate mortgage.

My current mortgage is a variable rate one at a 2.6% interest rate. That interest rate has stayed steady for the last three years but can go up or down depending on prevailing interest rates. When my five year term is up in two years I'll have to either do a renewal with my existing lender (easier) or negotiate a new mortgage with a new lender. One option will be fixed-rate mortgage interest based on the prevailing rates at that time adjusted by the lender to account for their projections of how interest rates will trend over the specific term of the mortgage. So if the trend is looking at rising rates, my mortgage rate for a new five-year term could be at a significantly higher rate than what I pay now. The other option would be another variable rate mortgage.

So a significant difference between Canada & the US is that here in Canada we can't know what our mortgage costs are going to be in the future - at least not beyond a five or seven year term. Although I have a nice low rate now, in a few years it could be crazy high. It makes long-term projections difficult. I think we are also fairly vulnerable here in Canada to borrowers taking on too much mortgage debt at times of low interest rates. With the short terms many aren't prepared for what impact higher rates can have in a few years when they have to renegotiate a new term.

FarmerPete

  • Bristles
  • ***
  • Posts: 346
Re: 30 year mortgages
« Reply #16 on: January 24, 2015, 08:03:50 PM »
The USA has what we call ARMs.  Adjustable rate mortgages.  Just about every ARM has a fixed interest rate for the first 3, 5, or 7 years of the mortgage.  This rate will tend to be low.  After the fixed time period is up, your mortgage rate will adjust every year to the prevailing rates.  There are caps as to how much it can raise in one year, as well as a maximum cap.  ARMs were sold mainly because you could get a better interest rate, and the average person doesn't live in a house more than 5-7 years before selling it anyways.

Another form of mortgage that is more common for commercial, but I've seen it on residential before, is a balloon mortgage.  Basically it's a 5 or 7 year mortgage that is amortized over 30 years.  At the end of your 5/7 year term, you'll still owe a ton on your house, and you'll be forced to sell the house or refinance it.  In practice, it's pretty much identical to an ARM, but it tends to have a slightly lower interest rate than an ARM.  The reason for that is because at the end of your 5/7 year term, your new mortgage will be 100% priced to the current market.  With an ARM, it's possible that interest rates will move faster than the ARM can legally adjust or go over the ARM max rate cap.

OneCoolCat

  • Bristles
  • ***
  • Posts: 442
  • Age: 33
  • Location: SoFla
Re: 30 year mortgages
« Reply #17 on: January 24, 2015, 08:27:42 PM »
A 30-year fixed mortgage in the US is exactly what it sounds like - you get an interest rate, it's fixed for 30 years, amortized over 30 years, and you pay it off.

Most do not have prepayment penalties, and you can pay it off (or refinance) at any time.  The ability for you to lower the mortgage rate that way, while they can't up it, is a big benefit to owning mortgages here in the US.

You can 100% get foreclosed on even if underwater

Uh, no.

If you are paying your mortgage payment, they can't foreclose.  It doesn't matter if your house is worth $1.  And why would they foreclose if you're paying, so they can own an asset worth less?

Your mortgage document outlines the terms of repayment, and their recourses for violations of the note.  Foreclosing based on the current value of the home when you are current is not one of them.

After they foreclose whether or not they can go after you for a deficiency judgement is another matter, and it varies by state law.  Here in NV they can sue you to collect the difference, but some states they can't, the house is the only recourse.  There are also non-recourse loans that are not tied to you personally, but that's not typical for a conventional mortgage.

No shit they cant foreclose if you pay your mortgage, that's axiomatic.

Tami1982

  • Handlebar Stache
  • *****
  • Posts: 1066
Re: 30 year mortgages
« Reply #18 on: January 24, 2015, 09:20:24 PM »
In Canada we have a government organization called the CMHC which provides insurance to the *lender* against default.    The purchaser has to pay the insurance premiums.   And the insurance is mandatory if you don't have at least a 20% down payment.   I don't think this exists in the U.S., or at least not as a government backed insurance plan.

I'm fairly certain this is what my loan is.  In the US it's called an FHA loan.  I put down 3% and have to pay a version of PMI (Private Mortgage Insurance) every month to insure the lender against my defaulting.  I'm lucky, I got my loan about three years ago so I only have to pay the PMI for 5 years or until my equity is above 21% - which I will make SURE it is before the 5 year mark. (Technically, it already is.  My house's value has went up so much that I'm at at least 35% equity, but they base PMI on the ORIGINAL appraisal and my bank won't allow you to complete a current one.)  At the end of 5 years it will be over, but if you get an FHA insured loan now - PMI is for the life of the loan!  Insane!


arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28295
  • Age: -999
  • Location: Seattle, WA
Re: 30 year mortgages
« Reply #19 on: January 24, 2015, 11:48:40 PM »
No shit they cant foreclose if you pay your mortgage, that's axiomatic.

Well that's what the claim was, and what I had to tell people in the other thread. Hey can't foreclose if you're underwater.

They can foreclose if you aren't paying your mortgage, whether you're underwater or not.

In other words, being underwater is irrelevant to them foreclosing - whether or not you're making your payments is the relevant part.

I had to clarify that then, and apparently again since people here said again that they can foreclose for being underwater. Just don't want false information  - they cannot foreclose on you just because you are underwater.   :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

PEIslander

  • Stubble
  • **
  • Posts: 168
  • Age: 59
  • Location: Prince Edward Island, Canada
Re: 30 year mortgages
« Reply #20 on: January 25, 2015, 03:04:02 AM »
Another form of mortgage that is more common for commercial, but I've seen it on residential before, is a balloon mortgage.  Basically it's a 5 or 7 year mortgage that is amortized over 30 years.  At the end of your 5/7 year term, you'll still owe a ton on your house, and you'll be forced to sell the house or refinance it.  In practice, it's pretty much identical to an ARM, but it tends to have a slightly lower interest rate than an ARM.  The reason for that is because at the end of your 5/7 year term, your new mortgage will be 100% priced to the current market...

So it appears that that the primary kind of residential mortgage we get here in Canada is what in the US would be called a 'Balloon Mortgage'. We have a choice between a fixed or variable rate.

Some Canadians wish we could get the American style 30-year mortgages. Most Canadians wish we could have American style deductions on mortgage interest!

SnackDog

  • Handlebar Stache
  • *****
  • Posts: 1276
  • Location: Latin America
Re: 30 year mortgages
« Reply #21 on: January 25, 2015, 03:26:28 AM »
The balloon feature and lack of tax incentive causes Canadians to pay off their mortgages much faster than Americans - on average in about 11 years.  That is a good thing from some perspectives.  If you are more interested in putting your money to work in the stock market, it makes more sense to have the longest mortgage you can get. I would be very happy with a 100 year mortgage - you are basically renting at a low rate but you get to control the property.  What's not to like?

clifp

  • Pencil Stache
  • ****
  • Posts: 541
Re: 30 year mortgages
« Reply #22 on: January 25, 2015, 04:20:43 AM »

After they foreclose whether or not they can go after you for a deficiency judgement is another matter, and it varies by state law.  Here in NV they can sue you to collect the difference, but some states they can't, the house is the only recourse.  There are also non-recourse loans that are not tied to you personally, but that's not typical for a conventional mortgage.

Not only do  recourse or non-recourse loans very by state but also if you have refinance or not. So for instance last I looked California was non-recourses for primary mortgage, so walking away from a underwater mortgage was relatively risk free (except the credit rating hit).  However, if you refinanced (and many California did) the mortgage suddenly became a recourse loan.

In a number of states mortgages are recourse, but during the foreclosure process the lender has to decide if it wants to pursue a judicial process (much more expensive and/time consuming) to go after the borrower, or allow an administrative foreclosure and just get property pack.

There was article in the WSJ last year, banks in place like Florida (a recourse state) pursuing borrowers who had defaulted in 2006/2007 time frame. There is evidently a 7 year a statute of limitations I going after defaulting borrowers in most state and the banks had waited until the housing market had recovered and were targeting strategic defaulters.

"Mr Jones, so happy to see your finances have recovered now how about paying us back the $200,000 you borrowed and never paid back, I am sure we can work out a payment plan...."

dragoncar

  • Walrus Stache
  • *******
  • Posts: 9311
  • Registered member
Re: 30 year mortgages
« Reply #23 on: January 25, 2015, 10:11:43 AM »
No shit they cant foreclose if you pay your mortgage, that's axiomatic.

They can't foreclose if you're underwater.

They can foreclose if you're underwater, but not because you're underwater.  I'm guessing phrasing is the issue here.

Being underwater does not magically protect you from foreclosure, which I believe is the point OneCoolCat was trying to make.
« Last Edit: January 25, 2015, 10:13:36 AM by dragoncar »

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28295
  • Age: -999
  • Location: Seattle, WA
Re: 30 year mortgages
« Reply #24 on: January 25, 2015, 11:27:25 AM »
No shit they cant foreclose if you pay your mortgage, that's axiomatic.

They can't foreclose if you're underwater.

They can foreclose if you're underwater, but not because you're underwater.  I'm guessing phrasing is the issue here.

Being underwater does not magically protect you from foreclosure, which I believe is the point OneCoolCat was trying to make.

Right.

If you look at the original thread OP was referring to, it was about someone worrying about getting foreclosed on for being underwater, and I noted how a lender can't foreclose because you're underwater, only if you're behind in payments.

That's why the more crucial part of leverage is cash flow. If you're cash flow positive, the value doesn't matter nearly as much.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

scottish

  • Handlebar Stache
  • *****
  • Posts: 1770
  • Location: Ottawa
Re: 30 year mortgages
« Reply #25 on: January 28, 2015, 07:30:40 PM »
Quote
I would be very happy with a 100 year mortgage

Yeah, I can see how the 100 year mortgage would be appealing if:

1.  You could pay it off whenever.    So you're not stuck with it for 100 years or with a big prepayment penalty.
2.  It is a low interest rate, as it is today.
3.  Your liability for the mortage is limited to the property.    So if real estate values tank, you can walk away with only your credit rating damaged.

You hold all the good cards in this deal, and the bank, not so much.