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Long-Term Mortgages Phasing Out?

Big changes may be coming for home buyers. In front of Congress are two new bills that promise consumer protection but may deliver exactly the opposite. Both the Housing-Finance Reform and Taxpayer Protection Act of 2013, and the Protecting American Taxpayers and Homeowners Act, take aim at Fannie Mae and Freddie Mac, the government-run giants of housing finance. And if Fannie and Freddie go--which lawmakers on both sides of the aisle advocate--the 30-year, fixed-rate mortgage will likely go with them.

The federal government has been boosting home ownership by subsidizing long-term fixed-interest mortgages for decades. The 30-year loan is the loan of choice for 80% of home buyers, and for good reason. Cheap money has helped millions become homeowners. Banks, who would normally run the other way when faced with a fixed-rate loan spread over so many years--with no prepayment penalty to boot--have embraced the conventional 30-year mortgage because of its government guarantee. The rates of return may not be as high, but if a borrower defaults, the lender still gets paid. With Fannie and Freddie pumping money into the system to keep things running, this is an investment lenders have been only too happy to make.

But without Fannie and Freddie, there is no government guarantee. And this will change everything.

Experts predict that the 30-year, fixed-rate loan won’t disappear entirely. It will, however, become too costly for most homeowners, with studies suggesting a probable price increase of 3%. To put that in perspective: if you borrow $200,000, your monthly payment on a 5%, 30-year loan will cost $1,073. To borrow that same amount at 8%, the payment jumps to $1,467. And that’s just for those lucky enough to qualify with private lenders.

The changes aren’t just around the corner--it will take some time to revamp the housing finance industry. But if you’re considering buying and like the idea of a 30-year, fixed-interest rate loan, the best time to start looking for that new house may be now.