Mastering Mortgages - A little History for the Day

 

Mastering Mortgages   Background Mortgages are a type of property loan that financial institutions, such as banks and credit unions, can offer when a prospective buyer decides against paying a property’s full cost in cash.  The lender provides funds to the borrower to purchase the property, and the borrower pays them back over a fixed time period, typically between 10 and 30 years. On top of paying back the base cost of the property, also called the “principal,” the borrower pays monthly interest to the lender.  Most buyers also pay a down payment—a portion of the property’s overall cost—to help reduce interest on their loan.  In 2024, 74% of homebuyers took out a mortgage. Debt owed on mortgages made up about 70% of US consumer debt as of 2025. History People have been formally lending money in exchange for interest and collateral since the fifth century BCE. But the term “mortgage” wasn’t adopted until around the 11th century in Britain.  At the time, the Latin term “Mortuum Vadium,” meaning “dead pledge,” described loans for land where the lender received all profit made on the land, which was applied to interest payments but not to reducing the principal debt. That made the land “dead” to the borrower until the loan was paid in full. Eventually, the Norman French language influenced the term, and it evolved into “mort gage.”   In the US, individuals loaned money to each other to buy property before institutional private financing was popularized in the 1800s. Throughout the 1800s until the 1930s, building and loan associations were the most common way to secure a mortgage (life insurance companies and mutual savings banks were also options). Mortgage banks were created in the 1870s to provide loans financed by mortgage-backed bonds (1440 Topics: Bonds). However, this practice eventually dissolved thanks to the recession in the 1890s. In 1913, commercial banks' involvement in mortgage lending expanded significantly. The 1929 stock market crash (1440 Topics: Stock Market) caused a housing market crisis when people couldn’t afford their mortgages. By 1933, over 1,000 homes were foreclosed on per day.  In 1934, President Franklin D. Roosevelt signed the National Housing Act into law, addressing the housing crisis as part of his New Deal. It also created the Federal Housing Administration, which offered government-backed mortgage insurance.  In 1938, the Federal National Mortgage Association (Fannie Mae) was created to offer more affordable housing loans to buyers. In 1968, Fannie Mae was privatized, and two years later, the Federal Home Loan Mortgage Corporation, or “Freddie Mac,” was established to further expand the secondary mortgage market. The biggest hit to the housing market since the Great Depression was the Great Recession, when the US saw approximately 3.8 million home foreclosures (learn how mortgage-backed securities and subprime loans helped fuel the crash).  How They Work Total mortgage costs typically include the principal balance, interest, insurance, and taxes.  A buyer’s credit score (1440 Topics: Credit Scores), the home’s price, the loan’s term length, and other factors determine the interest rate. The most popular mortgage in the US is a 30-year fixed-rate mortgage (see how mortgage rates have changed since 1971).  Homebuyers who choose a shorter loan length end up paying less in interest long term, but have higher monthly payments, and vice versa (see a mortgage calculator). Conventional, jumbo, fixed-rate, adjustable-rate, and government-backed loans are the most common types of mortgages (see the pros and cons of each).  To secure a mortgage, buyers must find a lender, apply for preapproval, put an offer on a property, apply through the lender, and close on the house. If accepted, the preapproval tells the buyer their maximum loan amount and estimated interest rate range. If the seller accepts the buyer’s offer on their property, they’ll officially apply for a mortgage through a lender. Once approved, the buyer chooses a closing date. Decline in Homeownership The 2020 US Census found that homeownership rates were at their lowest since 1970 and that the recent increase in renters has outpaced homeownership growth.  In 2024, homebuyers typically paid more than five times their income for a home, compared with 1965 when buyers typically spent less than three times their income. In 2023, the average age of first-time homebuyers was 35, a four-year increase from 2013.