50% Down Payments: A Difficult Time in the History of Mortgages

Most of us know the basics of a mortgage: it’s a loan that helps you buy a home, and you pay it back with interest, but home financing has changed drastically over the years. The story is surprisingly interesting and shows just how far home financing has come.

Ancient Beginnings: 5th Century BC

The idea of borrowing money to buy property goes back to ancient civilization dating back to the 5th century BC. Property loans were made more formal during the Roman Empire when they offered the loans directly.  Loans in the U.S. that we are familiar with began in the late 1800’s.  Back then it was a simple trade, property in exchange for a promise to pay it back.

1800’s: Balloon Mortgages and Big Down Payments

In the late 1800s, more people were moving to the U.S., and the demand for homes skyrocketed. That growth brought changes to the housing market, but mortgages were tough to get.

Back then, buyers typically had to put down 50 percent. The loan term was usually only 5 years, and most payments were interest-only. At the end of the term, buyers had to make one massive “balloon” payment to repay the entire loan balance.  This model meant that only wealthy families could realistically afford to purchase homes, while most people had no choice but to rent.

1920’s: The Great Depression and The First Housing Bubble

The interest-only loan structure started in the 1800’s had become very popular by the 1920’s, making it seem like homeownership was finally within reach for those that couldn’t afford 50% down payments. The problem? These loans gave people a false sense of what they could afford.

When the economy crashed along with the stock market in 1929, housing prices plummeted and many families who had taken out these loans couldn’t keep up with payments, leading to a wave of defaults and foreclosures. Going forward, this changed the way mortgages went.

1934: The Federal Housing Administration Steps In

To stabilize the housing market, the government provided emergency relief for mortgage debt through the Home Owners Loan Act creating the Federal Housing Administration (FHA) in 1934. The FHA helped make homeownership more realistic by introducing lower down payments, longer loan terms (20 to 30 years) and FHA-insured mortgages to reduce lender risk.  These changes opened the door for many Americans to realize and afford home ownership.

1980s: Adjustable-Rate Mortgages Enter the Scene

In the 1980s, adjustable-rate mortgages (ARMs) were introduced. Unlike fixed-rate loans, ARMs allow interest rates to change over time. That meant someone who borrowed at a high rate in 1981 (around 16 percent!) could see their rate drop if the market improved.

This flexibility made ARMs attractive for some buyers, especially when interest rates started to fall later in the decade.

2008: The 2nd Housing Bubble Bursts

Fast forward to the early 2000s. Like the interest only loans of the late 1800s - 1920s, relaxed lending standards made it easier for unqualified buyers to get mortgages. The housing market overheated, and when prices started to drop in 2007, everything came crashing down. The 2008 financial crisis led to massive foreclosures, a government takeover of Fannie Mae and Freddie Mac, and the start of the Great Recession. It was one of the most significant shakeups the housing industry has seen since the Great Depression.

2020: COVID-19 and a Record Low Rates

When COVID-19 hit in 2020, the economy along with the housing market came to a screeching halt. Mortgage rates dropped sharply as the Federal Reserve tried to keep the economy moving and lower rates led to a surge in home buying and refinancing, sending prices soaring. 

Rates eventually rose, which quickly reduced the number of homes for sale as no one wanted to trade in a 3% loan rate for the peak of almost 8% in late 2023.  Inventory was now the driving force of the housing market, causing unprecedented competition.  Rates have stabilized and inventory is climbing but the market is still competitive.  Affordability continues to be a challenge for many buyers but solid lending practices and better loan regulation should prevent another bubble.

The Bottom Line

Mortgages have changed a lot in the last hundred years. It’s hard to imagine having to put down 50 percent on a house today when some loans only require as little as 3.5 percent down.

The biggest takeaway? Home loans have become more accessible and better regulated, but it’s still important to understand the terms of your mortgage before you sign. A little research upfront can save you a lot of stress later.

At Gladys Manion, we have wonderful lender resources for you. Call us at 314-721-4755!