Home ownership is one of the greatest American Dreams. And today’s home loan makes it possible for millions of people to obtain a house of their own. With its roots starting in the 19th century, mortgages have been integral to success and financial security in our society. But those first home loans were quite different from those of today. Read on to learn more about the journey of the American mortgage.
Humble Beginnings
Mortgages in the U.S. came about for very similar reasons they are used today. As our population grew, so did those wishing to buy a home. In particular, farmers and ranchers were looking to purchase land. These first home loans had much more stringent requirements than today’s version, however. In fact, you had to pay 50% of the mortgage up front before you could be approved for financing. And you owed the remaining half in only 5 years. While this early American mortgage was harder to qualify for, it did provide many an opportunity to own their own home.
The American Mortgage Gets A New Look
Unfortunately, financial institutions took a serious hit when the Great Depression occurred. And President Roosevelt’s New Deal policy transformed a number of programs, including the American mortgage system. The newly created FHA (Federal Housing Administration) eased the requirements of home loan approval, thereby allowing more individuals to purchase a house.
Another change the FHA made was to increase loan repayment terms from 5 years to 15-30 years. Additionally, a person’s risk was appraised by how well they could repay the loan as opposed to already having the funds to purchase. And borrowers only had to pay 10-20% of the purchase amount upfront (as opposed to 50%). Finally, the FHA incorporated the interest of a loan into the actual monthly payments, allowing borrowers to slowly pay it off gradually over the life-span of the loan term.
A Change To The Quality Of Homes As Well
The American mortgage wasn’t the only thing the FHA improved. In order to ensure the lifespan of homes actually outlasted those of a loan (and thereby making sure borrowers paid off the full amount), the FHA established stricter standards for home construction. Houses obtained FHA-insurance more easily if they were of quality build. As such, the average lifespan for a home was 30-50 years.
Baby Boomers Change The Playing Field
After the end of WWII, the American economy flourished. Soldiers returning home from war began looking for homes for their new families. The Department of Veteran’s Affairs created a system that allowed prior military members to qualify for a VA-insured loan. A unique aspect of the VA loan was no requirement for a down payment. As such, millions of veteran’s purchased homes, thus creating a booming housing market.
Relatedly, baby boomers were one of the primary contributors to the growth of the housing market. As the average nuclear family grew in size, potential home buyers began to look for larger houses. Suburbs became the ideal environment for families, especially as highways provided an easy commute to and from city jobs. As such, these neighborhoods grew drastically in size during the 1950s and 1960s, causing an influx of homeowners.
Inflation and The Rise Of Interest Rates
In the 1970s and 1980s, as the housing market continued to increase, so did interest rates. In fact, the average interest rate for the American mortgage was 20%! During the 1990s, home buying decreased to all-time lows, as many couldn’t afford to pay such high rates on a loan. So, the government lifted some of the requirements for loan qualification, which resulted in a large population of people obtaining a home, though they were at a much higher risk for defaulting on repayment.
The Recession Of The 2000s
Providing home loans to unqualified individuals proved to be one of the primary factors that contributed to the burst of the housing bubble. At the same time hoards of individuals were defaulting on their loans, the value of properties also drastically dropped. As a result, our economy experienced one of the worst drops since the Great Depression.
Moving Forward
After the government bailout of banks and lenders (which cost billions of dollars), the American mortgage returned to more stringent requirements in order to prevent a repeat of the housing bubble burst. Today, interest rates have returned to much lower numbers, creating great opportunities for first-time home buyers and those looking to refinance their current mortgage.
No matter the type of home loan you’re applying for, our team of experts will get you some of the quickest quotes, lowest rates, and fastest closing times on the market. Visit us online today for the ideal home loan experience!