Is Our Dependence on 30-Year Mortgages a Bad Thing?

With the mortgage rates the way they are lately, some analysts are questioning the benefits of so many new homeowners choosing the 30-year fixed rate mortgages over the other products that are available to them. According to some, these 30-year mortgages have a number of disadvantages when compared to the mortgages in rest of the world.

In 2009, about 95 percent of the mortgages that were the 30-year long term mortgages. However, many other developed countries show much lower numbers. In fact, only about one percent of the home buyers in 2009 in Spain chose the 30-year fixed rate mortgages while about two percent in Korea did. About 10 percent of the home buyers in Canada chose these long-term products and 22 percent in Japan made the same decision. Those numbers are according to a study conducted by Michael Lea, an official with the San Diego State University real estate center.

The study also shows that these other countries where the long term mortgages are not as popular are showing lower rates of default than in the United States. As a result, Lea claims, the mortgage crisis was the result of not matching borrowers with the proper loan designs rather than the home loans themselves. In addition, there may be lower rates of default in these countries because lender rights are more protected and enforceable than they are in the United States.

Lea also found some other interesting facts about the United States mortgage industry compared to that of other countries. For instance, most other countries do not have bans on prepayment penalties for fixed-rate loans. These bans do not exist in some other countries so the lenders can receive some type of compensation for the loss of interest they will experience when a home buyer submits a full or significant payment towards paying off their loan before the terms are up. The United States simply adds this cost to all mortgage products as a way to help compensate lenders for any loss of revenue stemming from prepayments.

These days, it seems that more and more first-time home buyers are opting for a shorter term mortgage loan. The 15-year fixed rate mortgages are picking up in popularity as the mortgage rates are helping more people afford the monthly payments for a loan spread out over only 15 years. Still, the 30-year fixed rate mortgage continues to be the most popular and practical for most home buyers in any situation. The secret is to find out which one is best for you so you can make an informed and educated decision based on your individual financial situation.