Translated: Death Pledge
Porté pour la vie
Welcome to The Yield Pages. This is our first of what we hope to be weekly posts on here.
The mission of this website, blog, or whatever else you want to call it, is to deliver information and thoughts that empower and motivate individuals to continue their educational pursuits outside of their university years; to think for themselves. The primary focus is to provide financial insights and analysis, but things may change from time to time. The contact page on the website is a great area for suggestions or criticism. We hope you enjoy.
A friend and their significant other recently bought a house and signed up for the enjoyable monthly payment we call a mortgage. This didn’t make a whole lot of sense to me, especially since rates are so high at the moment. Nonetheless, the two make good money as high-end white-collar workers, and it got me thinking about mortgage history in the United States. So, I did some digging.
At its core, a mortgage is simply a loan. This type of loan is advantageous for lenders, since, aside from a massive decrease in housing prices, the principal and interest a borrower pay are collateralized by the house itself. The payments stay the same, but the breakdown of the interest and principal components change over time. Simple enough – So where did this all start?
The American Dream sold the pursuit and desire of owning a home. Outside of roughly 2009 until early 2022, it has been cheaper to buy in the United States. Today, that story is different, with the average cost to rent sitting at ~1,850, and the cost to buy at ~2,700, thanks to the rapid increase in rates, which we plan to write a piece on soon.
In the 1800s, owning a home was an immense privilege, and it wasn’t until the 1900s that the narrative started to change. Around this time, commercial banks were looking for ways to expand their profits, so they came up with a way to expand access to mortgages (translated: death pledges) across the country, all while structuring interest payments across the life of the loan.
As part of the New Deal, The Federal Housing Administration was born and provided guaranteed loans by the federal government. At first, these loans were 7, 10, & 15 years. This allowed for constant monthly payments as opposed to the old school upfront down payment, the interest over time, and then the rest of the sum at the end of the period.
The problem is, it sounds like a good deal, but, when consumers stopped being able to afford 15-year monthly payments, the 30-year mortgage was born to decrease monthly payments. The issue here is that the interest compounds over time, and thanks to the structure of the mortgage known as amortization, stretching this over time leads to overall lower monthly payments. This is just a fancy way to say the debt is a constant payment over time. People make money off confusing the population, and people often prefer short term gains over long term growth, but that’s a topic for another time. One might assume that this pursuit of homeownership allows for the freeing of the perpetual rent cycle, but the reality is different.
Now, you might be thinking, well doesn’t this train slow once homes are owned over time? Nope. That’s the thing, your home was never meant to be yours. You move into a two-bedroom home, but once you have a second child or move cities, you suddenly need three bedrooms, so you move into a bigger house, with a new mortgage and another monthly payment plan, and since the vast majority of initial monthly payments go towards interest, the equity you have built in the home is negligible, and the cycle never ends.
Then why buy a home? It’s not the issue of buying a home, it essentially boils down to money management. We aren’t financial advisors, but continuing a learning and growth mindset is imperative to financial literacy, allowing you to live life to the fullest without any surprises.
Thanks for reading.
- Mickey
By the Numbers:
The highest delinquency rate since 2000 was 9.3% in 2010 – compared to 3.5% in Q1 2023
The average sales price of a new home in 2022 was roughly $540,000
COVID pushed 25% of millennials to say they were ‘more interested in buying a home.
As of 2022 there was $13.37 trillion of outstanding debt on family residences in the United States
