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Why The 30-Year Fixed-Rate Mortgage Is Insane

By Scott Melbrod

There are plenty of things in the financial world that are blindly accepted as universal truths. But that doesn’t mean they are right, the best option, or that there aren’t other (and better) alternatives. And in the case of the 30-year fixed-rate mortgage, this is definitely the case.

Think about it this way: who lives in a house for 30 years anymore? Hardly anyone, especially if this is your first home or aren’t approaching retirement age. A recent survey conducted by the National Association of Realtors (NAR) revealed that sellers typically stayed in their home for 10 years. (1) Another NAR study also found that the age of the buyers made a difference in how long they stayed in one home. Those under 36 only expect to live in their homes for 10 years, but for the 52- to 61-year-old crowd, that number jumps to 20 years. Only about 18% of buyers plan to stay in their home forever. (2) What these numbers tell us is that the 30-year fixed-rate mortgage doesn’t make any sense for younger, accumulator clients.

Downsides To The 30-Year Fixed-Rate Mortgage

If you are an accumulator, you are at the start or middle of your career and are probably experiencing many life-changing events in a short period of time, such as getting married, having children, starting a business, or buying your first home. Because of all of these transitions that accumulators face, that 10-year expectation of staying in one home may be even shorter. Why would you get a 30-year fixed-rate mortgage if you aren’t planning to stay in your house for 30 years?

Most mortgage loans, outside of FHA loans, are not assumable, meaning they can’t be handed off to the new seller and end as soon as you sell your home. This locks you into an interest rate for 30 years. The only benefit to that is if you stay in your home for 30 years. If you don’t, it means you are paying a higher interest rate than if you locked in for 5, 7, 10, or 15 years.

Alternatives To The 30-Year Fixed-Rate Mortgage

Many people don’t realize that there are plenty of options for financing their home. Whether it’s due to a lack of general education or a lack of motivation for real estate agents or mortgage brokers to offer these products, we find that clients often choose the 30-year fixed-rate mortgage because that’s all they were offered. Here are some other options to consider.

FHA Or Non-Conventional Loans

A Federal Housing Administration (FHA) loan is a government-backed mortgage that appeals to first-time homebuyers due to its lower requirements for credit scores and down payments. The FHA loan offers a 15-year term in addition to its 30-year mortgage.

Conventional Loans

Conventional loans are separate from any government agency. They typically offer terms of 10, 15, 20, or 30 years, and the shorter the term, the lower the interest rate.

Adjustable Rate Mortgage

With this mortgage option, your interest rate is set for a specific time period. At that point, your rate could change annually, depending on the market, but won’t increase more than 5% of the original rate. ARMs are usually available with both conventional and non-conventional loans.

Interest-Only Loans

These loans are exactly what they sound like. Throughout a predetermined period, you only pay the interest, meaning your principle never decreases. This does reduce your mortgage payment, but many of these types of loans have a set time period of only paying interest before you start paying an amortized amount.

Interest-Only Adjustable Rate Mortgage

And then there’s this hybrid version of the interest-only mortgage and adjustable rate mortgage. Here’s how it works: you, as the borrower, only pay the interest each month for a specific period of time. After this initial interest-only period, the mortgage is amortized so that it will be paid off by the end of its term. On top of the interest-only and amortization periods, the loan’s interest rate will fluctuate, so depending on the markets, your monthly payment may change.

Not All Debt Is Bad Debt

It all comes down to the concepts of productive and unproductive debt. Productive debt is basically using other people’s money to buy assets that will either pay a higher rate of return than the interest rate of the debt or appreciate more than the interest rate on the debt. In the case of purchasing a home, you take full control of the property but only contribute a small percentage of the full price, which is your equity in the deal.

Unproductive debt is consumptive debt, or using other people’s money to purchase things that you may use up or things that depreciate over time, like a car. A car may be useful and productive, but it’s not an investment.

And if you’re thinking that your primary home isn’t an investment due to the low amount of money needed for a down payment and deductible mortgage interest, you can still use this tax-advantaged debt to own your home versus renting. This may also free up the cash needed for other ventures you want to pursue, such as starting a business or buying a rental property.

Stop That Spinning Head

If all this information is not only new to you but also mind-boggling, that’s what Accumulation Wealth Partners is here for. Our mission is to help you get a jump-start on your finances while you are in your accumulation years. And unlike most legacy/traditional financial firms, we focus on both your assets and your liabilities (mortgages in this example) when working with clients. The right side of the balance sheet (your debt) can often be just as important to structure properly as the left. We believe making informed investment and planning decisions now that will compound into financially attainable dreams later. If you want to discuss how to maximize your money when it comes to your mortgage payment, schedule a free 15-minute introductory phone call!

About Scott

Scott Melbrod is the founder and CEO of Accumulation Wealth Partners, an independent wealth management firm in San Diego, CA. Working with a wide array of clients, from families to young Millennials just starting their careers, his mission is to provide impactful and targeted financial advice at a transparent cost to people in their accumulation phase of their lives. With more than 15 years of industry experience, he uses his knowledge to develop for his clients a structured and tailored plan designed to guide them toward financial freedom. Learn more about Scott by connecting with him on LinkedIn or emailing him at scott@accumulationwealth.com.  


(1) http://www.freddiemac.com/blog/homeownership/20180206_2017_housing_trends.page

(2) https://www.nar.realtor/sites/default/files/reports/2017/2017-home-buyer-and-seller-generational-trends-03-07-2017.pdf