Question

4) Typically, home mortgages are 30 year loans. The overwhelming percentage of mortgages get paid off well before 30 years. On average, mortgage loans get repaid in 3-7 years. Why is there a difference between the 30 year term, and the 3-7 average? What would happen if banks did away with thirty year mortgages and made all mortgages just 3 years?

Answer 1

Mortgages are a big liability for homeowners in USA. The homeowner would like to have a steady payment which they can afford. Therefore at the start, they want the payments to be less. At this time, they are usually start of their careers and have a lower amount of income. As time moves forward, the incomes increase and the owners want to remove anxiety of mortgage in their way. They usually prepay to fully own the house. Now this is usual case but not the case with everyone. The banks cannot do away with this as there are individuals who need a full term for repayment. Also no one knows the future and rarely would people go for a lesser term than even 15 years. The payment for a 3-7 years loan shall be very high and no body would take such a loan. A 3 year loan would be vey difficult initially as there would simply be not enough income to pay off.

answered by: anonymous