Mortgage Products: The Fixed Rate Mortgage

In order to understand the theory behind the fixed ratemortgage, you have to understand the mindset of the mortgage banker and themortgage borrower of thirty or forty years ago. The Great Depression left a tremendous impression on the minds of thiscountry, so much so, that one of the popular mortgage products of the turn ofthe century, the interest only loan, was shelved, never to be heard from again.Not until the recent explosion in real estate prices and the mortgageindustries efforts to accommodate home buyers of all types has there been suchmortgage variety.

The trend after the depression, through post-war America, and really until the late1990s was the fixed rate mortgage. That’s the type of mortgage the bank offered, and the public generallydidn’t consider anything else. Why didso many individuals, as well as banking institutions popularize the fixed ratemortgage? This loan type, more than anyother product available, was a security blanket for the banker, and thehomeowner. 

The banker, offering the mortgage loan, was assured of a 20% down payment and a securemonthly payment with a fixed interest rate that would benefit the bank. The homeowner received a set monthly paymentamount that was affordable, and a fixed number of years to repay the loan,usually 20 or 30.

Since interest rates weren’t fluctuating then, as now, and real estate prices werefairly predictable, this was a win-win situation for everybody. Then came the extremely high interest ratesof the 80s, and suddenly bankers were locked into mortgage with a fixedinterest of only 7 or 8 percent. It isat this juncture that the lending institutions and the mortgage companies beganto re-think the fixed rate mortgage. Maybe adjustable rate mortgages were better suited for such afluctuating market; they could then reassess the interest rate if the ratesskyrocketed. This wasn’t something thehomeowner was in favor of using, but really what choice do you have? And usually, at some point, the rate willswing in the other direction. That’sexactly what happened during the late 90s and early part of 2000. 

Since 2001, interest only loans, 125’s and ARMs have grown in popularity; on average, theinterest only segment of the market is now around 30%. That’s an increase from 3% in 2001. The market has never before experienced thevariety now available for mortgage products, but never before have we experiencedthe growth in real estate prices and lowered interest rates that we have seenin the last 5 years. 

The beauty of all this growth, the fixed rate mortgage is like the little engine thatcould. It’s still around, still chuggingup the hill, and still getting the job done. Statistically, many homeowners never payout their mortgage; they eithersell their home or they refinance before the mortgage completes. This may be true, but for many of thehomeowners I questioned, their home purchase was for the purpose ofestablishing a permanent residence, one in which to retire and live out theirlives. That makes the good old standard20 year Fixed Rate Mortgage look really good, even the 30 is still around(although not quite as appealing). 

While there are places in this country that the real estate market has really boomed,and the real estate prices are soaring, there are still many that have not feltany effect, and for whom the appraisal prices of the 90s are still goodtoday. When you consider the trade-offfor the adjusting interest rate, the flexibility of paying interest only, andthe borrowing power of the 125, it’s hard to imagine that they are stillhomeowners who wish to use the fixed rate mortgage. That’s because, however you’re not looking atthe entire picture. Many of thesehomeowners have experienced at least one job layoff. Many of the baby boomers that bought houses10 or 15 years ago were getting ready for retirement, and many of thehomeowners live on fixed budgets. Thepurpose in purchasing a home for the vast majority of these homeowners was toprovide for themselves a secure, paid for place to live. These homeowners aren’t interest in how toinvest the equity of their home, nor are they interested in the other optionsthey could exercise when investing their mortgage payment elsewhere. They’re simple interested in paying for theirhome, and the fixed rate mortgage is the slow and steady payment that willaccomplish this task.