Debate Continues Over Fate of 30 Year Fixed Rate Mortgage

By Kyle Chezum Updated on 5/4/2011

 

Policymakers have begun taking steps to recreate and resolidify the nation's housing finance market in the wake of the second most devastating financial crisis in American history, and one of the issues they're considering is the fate of the 30 year fixed rate mortgage.  Many economists have raised the question of whether this mortgage loan type is needed any longer.  The argument essentially runs two ways.

In one camp, those who believe the 30 year fixed rate mortgage is no longer necessary claim that it should be abolished because interest rates are low enough that homeowners no longer need a lengthier payment option.  One of the primary benefits of the 30 year fixed rate loan is that it allows borrowers to spread the principle of the loan over a longer period of time, thus reducing monthly costs.  But in times of low interest rates, these monthly costs would be lower anyway, even with a shorter loan term.  Providing loans with longer terms simply creates additional risk in the marketplace.

In the other camp, those who believe the 30 year fixed rate mortgage is a vital part of the American finance market point to fluctuating interest rates and the very real likelihood that rates will increase on the way up and out of the financial crisis as reasons why the 30 year loan is still valuable and necessary.  Policymakers have asked for advice from both sides of the issue.

The goal of the housing finance market is to provide safe and reliable financing options to middle class individuals and families, as it is most important that this segment of society is able to buy homes.  If the middle class can't afford to step into home ownership, the significant financial and economic turmoil that has been common for the past few years will continue.  Economic recovery simply can't happen without real estate on board.