Before the 1930s, home mortgage loans were for three to five years, renegotiated and refinanced as they expired. But as banks failed in the Great Depression, this rickety, unpredictable system of short-term borrowing collapsed.
In 1934 President Franklin D. Roosevelt’s New Deal stepped in with a new and better way of financing housing and building ownership: long-term fixed-rate mortgages backed by federal loan guarantees. Originally, these mortgages were for 15 years, later for 20 years, and finally extended in the 1950s to 30 years. At that point, it became the standard for all mortgages.
What are the advantages of a 30-year mortgage? Predictability, for one. The buyer know how much the payment will be for a long period and can plan around it. Flexibility, too. If the buyer’s salary grows and she has cash to spare, she can make extra payments without penalty and pay off the mortgage in less time. And because the monthly payments are lower than, say, with a 15-year mortgage, more people can afford a house.
Since the 1930s, home ownership has grown from about 40 percent of American families to 64 percent today. (The actual numbers are even more impressive. In 1940 only 15 million families owned the houses they lived in. By 2019 81 million did.) A growing economy deserves much of the credit, but so does a system of housing finance that suddenly put home ownership in the reach of millions—a system introduced and managed by the federal government.
So if you own a house that you bought with a 30-year fixed-rate mortgage, you can thank government for it.
Give the credit to: federal government
Photo by jongorey. Licensed under Creative Commons.