Tweaking 15-Year Mortgages to be ‘Half-Amortizing’ Would Help Banks and Home Buyers

Examining the Economics of Half-Amortizing Mortgages

Let’s examine a practical example:

• A $300,000 30-year fixed-rate mortgage at today’s rate of 6.7% would result in a monthly payment of approximately $1,935.

• A $300,000 15-year half-amortizing mortgage at 6.0% (reflecting the typical rate advantage of shorter-term loans) would yield a monthly payment of about $2,027—only slightly higher than the 30-year option.

• At the 15-year mark, the homeowner would have paid off $150,000 of principal, leaving a remaining balance of $150,000 to refinance.

• Even if interest rates rose dramatically to 10% at refinancing time (an extreme scenario), the monthly payment on the remaining $150,000 would be approximately $1,613—still lower than the original 30-year payment.

• More realistically, if rates remained stable, the refinanced payment would drop to around $1,266, providing substantial payment relief after 15 years.

One potential concern is refinancing risk — what if home values decline significantly, making refinancing difficult?

First, historical data shows that in any 15-year period in modern American history, home values in the 20 largest metropolitan areas have never declined in nominal terms.

Second, by the time refinancing becomes necessary, most homeowners would have built substantial equity — at least 50% loan-to-value. This would make them extremely attractive to lenders even in challenging market conditions.

Who Would Benefit from a Change? Everyone

The transition to 15-year half-amortizing mortgages would benefit multiple stakeholders.

• Homeowners: Lower lifetime interest costs, better alignment with actual homeownership duration, and significant protection against interest rate increases.

• Community banks: Return to a market they helped build but were largely forced out of by government-subsidized 30-year products.

• Financial system: Reduced duration mismatch between bank assets and liabilities, creating a more stable lending environment.

• Housing market: More efficient financing could help address affordability challenges by reducing lifetime borrowing costs.

Seeking the Path Forward for Mortgage Reform

The current mortgage system, built for a different era and different economic conditions, has outlived its usefulness. The agencies offering highly subsidized 30-year fixed-rate mortgages need to be scaled back, allowing market forces to create more efficient and appropriate lending products.

The 15-year half-amortizing mortgage represents a practical compromise that preserves the consumer protections that Democrats value while creating the market efficiency that Republicans seek. It’s a rare opportunity for a win-win solution in housing finance policy.

In today’s challenging housing market, with rates hovering near 7% for 30-year mortgages and home prices at record highs, innovation in mortgage products is urgently needed. The half-amortizing approach offers a practical solution that could benefit millions of American homeowners while strengthening our financial system.

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