40-year home mortgages, 9-year car notes, and 25-year student-loan programs: This will end badly

Interest rates, as the tv hucksters constantly remind us, are near historic lows. So now is an excellent time to refinance your mortgage--maybe take out some equity to upgrade the bathrooms, take a little vacation, or purchase a home entertainment center.

Or maybe it's time to buy a new vehicle--perhaps a premium class crew-cab pickup, an Audi, or a BMW.  At today's interest rates, the monthly car note won't be that high--especially if you finance your new set of wheels over six, seven, eight, or even nine years!

How about those student loans? You don't make enough money to pay off your college debt under a standard 10-year repayment plan because you have other bills to pay.  But that's no problem. You can sign up for an income-based repayment plan that will stretch out your monthly payments over 25 years.

Twenty-five years is a long time, but maybe the federal government will forgive all that student debt--including yours. After all, what's $2 trillion among friends?

So is everybody happy with their new homes, fancy cars, and impressive college credentials? If so, enjoy the feeling because it won't last much longer.

Inflation is on the move, and who believes it is transitory as our Treasury Secretary tries to reassure us. Wages will probably rise to cover inflation for some employees but not for others. And if you a retired person on a fixed income, inflation will soon erode your standard of living.

That vacation cruise to Greece that you've always dreamed of? Maybe you'll just go to Oklahoma's Boiling Springs State Park this year--a lot cheaper.

Of course, you can't fly to Boiling Spings because airfares are way up, and car rental rates are just short of obscene.  So you will have to drive.  But you should do it soon because gas prices are on the rise. Oil is already back up to $75 a barrel.

So maybe you'll skip a vacation this year and enjoy your backyard--grill a few steaks or hamburgers. But that's becoming more expensive too. A premium steak at the grocery store can cost you $25 a pound.  But hot dogs are cheaper--especially the ones that aren't all beef.

There's nothing the people living in flyover country or modest urban neighborhoods can do about the scary shifts in the national economy.  We will have to tighten our belts, pay off our debts, and cut back on our lifestyles.  

It won't be fun, but we will probably all be OK if we don't do something stupid like refinance our home over 40 years, buy a car on a 9-year note, or borrow $100,000 to go to college.  But most of us are too smart to do something reckless like that.   Right?

You will own it outright in only 9 years!

 

40-year home mortgages: Is that a good idea?

 The chickens have come home to roost.  The federal government allowed millions of homeowners to suspend payments on their mortgages during the COVID crisis. Now that moratorium is ending, and all those missed payments are now due.

Many American homeowners--maybe most of them--cannot pay a dozen mortgage payments at once. I know I could not.

So what will the feds do? According to a Houston Chronicle story, the government is thinking about allowing mortgagees to refinance their home loans over 40 years. Interest rates are low right now, and monthly payments on a 40-year mortgage would be less than payments on a 30-year or 20-year mortgage.

Is that a good idea?

No, it is not. Most people who refinance their homes over 40 years will never own their residences. Essentially, they will become renters. 

Of course, many people will sell their houses long before they pay off their mortgages. If they are lucky, the value of their home will have gone up, and they can pay off their mortgage and have enough remaining equity to buy another home.

But here is the problem.  Home prices are going up right now because of low interest rates--only about 3 percent. Also, some Americans are worried about inflation, and they are scrambling to put their money into hard assets--a second home perhaps.

But interest rates won't stay low forever, and the housing market will eventually cool. Everybody knows that.

Thus, a couple who finance their home for 40 years at 3 percent may be forced to sell it someday when mortgage rates are higher--say 6 percent. Buyers who take out mortgages at the higher rate will be making bigger monthly payments on their home purchase--even if the cost of the house does not go up.

So what's going to happen? Many people who finance their homes over 40 years at 3 percent interest will not be able to sell their homes for enough money to pay off their mortgages. 

In the years to come, hundreds of thousands of homeowners who can't sell their homes after interest rates spike upward will simply walk away from them.

But hey, what do I know? I'm just a retired professor who lives in the very heart of flyover country.

But I have seen this movie. I bought my first home in Anchorage, Alaska, in 1981.  Conventional mortgage rates were 11 percent at that time, but the State of Alaska subsidized home loans to get the interest rates down to 9 percent.  

In a further act of generosity, Alaska subsidized low-priced homes--homes selling for $80,000 or less--at 6 percent. The required down payment was low--only 5 percent. Such a deal! Developers put condos and even mobile homes on the market that cost--guess what? $79,900.

Unfortunately, the Alaska economy went south when oil prices slid to $13 a barrel.  People were thrown out of work, and home values plummeted.

Many Alaska homeowners could not sell their property for enough to pay off their mortgages.  So what did they do?

They mailed their house keys back to the bank and simply walked away.  

That, dear readers, is what will happen all over the United States if people start financing their homes at artificially low-interest rates over 40 years.