One of the things I like to do while working out or puttering around the house is listen to podcasts. One of my favorites is Stuff You Missed in History Class, who recently put out a two part episode on Redlining. As described by the Justice Department, “‘Redlining’ is the discriminatory practice by banks or other financial institutions to deny or avoid providing credit services to a consumer because of the racial demographics of the neighborhood in which the consumer lives.” It’s a fascinating listen, but as part of the first episode, they gave a bit of history of the mortgage industry in the United States, which I found really interesting.
Mortgages in the U.S. really started in the 1930’s. At that time, the majority of people rented rather than owned. Why? Likely because the repayment terms were ridiculous! You had to put down at least 50%, and the term of the loan was only a few years, at which point you had to pay off the rest of the loan in a huge balloon payment. A far cry from today’s 30 year mortgages.
Thankfully, the Federal Housing Administration got involved and started offering 15 and 30 year mortgages, forcing other lenders to do the same if they wanted to stay in the industry. Today, the 30-year fixed interest mortgage is the most popular in the United States.
What does that term mean? Well, it means that you have a mortgage that you need to pay off in 30 years. In that 30 years, unless you intentionally change something, your payments will not change. Your interest rate is locked in. If interest rates suddenly skyrocket to 15%, but you got a mortgage at 5%, you’re still only paying 5% interest. It’s a pretty good deal. Of course, if interest rates drop, you may choose to refinance your mortgage, which means having all of your assets looked at again, having your home appraised, and hoping that a mortgage company will offer you a lower rate. But if you’ve kept your home in good repair and your finances are sound, it’s a pretty safe bet.
I took a look to see what the norm is in other countries. In Canada, the norm is the five-year fixed rate over 35 years. That was a little confusing, but basically, what it means is that you have a five-year fixed rate mortgage, and at the end of that five years, your mortgage is refinanced based on the current rates. This doesn’t seem like a win for Canadians but they can also take their mortgage with them when they move, something very different from the US system. Each method has its benefits.
In researching, I also learned a bit about Sharia compliant mortgages. Under Islamic Law, paying or collecting interest is not allowed. So that would make homebuying quite complicated, right? Thankfully, there is a great workaround. Companies will buy the home with the prospective homebuyer. The homebuyer pays 20% (the down payment) and the company pays 80%. They own the home together. They have a plan for the homebuyer to pay the company the 80% over a number of years. No interest. Instead, the homebuyer also pays rent to the company, who is acting as landlord. It allows a family to buy a home without going against their religious beliefs. I thought that was pretty neat.