Ten year Fixed Rate MortgageFixed-rate mortgage for ten years
Mr. Glenn Hubbard, former Chair of the Council of Economic Advisers, recently commented on the crisis: "In other words, the cost of their home had sunk below what they owe on the mortgage, in other words, billions of home-owners who were currently on their mortgage repayments could not afford to pay lower interest because they were under water.
This is only half the statement; the other half is that these landlords could not get a lower interest rate because they had a fixed-rate mortgage. They therefore maintained what had become a burdening interest rate in relation to the overall interest rate on the markets. On the other hand, the interest rate on variable rate mortgage loans drops naturally, even if the declining cost of the home has flooded the mortgage.
As a result, mortgage repayments due are reduced by default, borrower pressures are reduced and liquidity is improved. Mortgagors in many jurisdictions profited from this fact during the turmoil, but not the unfortunate Americans who had a 30-year fixed-rate mortgage coupled with a falling home rate. Of course, variable-rate mortgage loans become more costly when interest rises, but are cheaper when interest falls - as they did during the dramatic economic upswing.
On the other hand, our 30-year fixed-rate mortgage is okay if home values rise forever, but in a residential inflation with declining interest levels they are horrible for the borrower. When the real estate bubble shrank, they proved not to be a "free lunch" of a continual refinancing facility, but a very costly luncheon for, as Prof. Hubbard says, "millions of home-owners.
As the leverage effect of the mortgage increased, it became more costly. Undoubtedly, the 30-year fixed-rate mortgage epidemic has exacerbated the US real estate financing crises.