According to the Federal Reserve, between 1980 and 2011, homeowners devoted 9.6% (average) of their income to mortgage loans. In contrast, according to elaborated data from the US Census Bureau and the Federal Housing Finance Agency, during the same period, households with a new mortgage devoted 25.8% of their income during the first year.

Why there is so much difference? Because 1) interest rates have fallen between 1980 and 2011 and 2) the most common types of mortgage loans, like Fixed or Adjustable Rate Mortgages (FRM or ARM) are level payment loans (constant payments in nominal terms). Consequently, as inflation rises, loan payments decrease in real terms. That effect is called the tilt effect because it tilts real payments to the early the years of the loan.

Let us examine the most acute example. In 1981, interest rates where at 14.9%. An average-income household would have needed to devote 35.8% of its income to return an average FRM loan. In 2010, they would have paid 12.1% of their income if they had kept their initial loan. If they had refinanced yearly at no cost, they would have paid 6.7%. The tilt effect can explain the difference between 35.8% and 12.1%. The fall of interest rates can explain the fall to 6.7%. If we analyze the data from all the years we can find borrowers that end up paying less than 5%.

When we analyze the loan payment to income ratio, we observe a great variance from the average (9.6%). While new borrowers pay 25.8% of their income, some of the old ones pay less than 5%. These results raise some questions about markets and housing policy, like entry barriers to homeownership or efficiency.

Why there is so much difference? Because 1) interest rates have fallen between 1980 and 2011 and 2) the most common types of mortgage loans, like Fixed or Adjustable Rate Mortgages (FRM or ARM) are level payment loans (constant payments in nominal terms). Consequently, as inflation rises, loan payments decrease in real terms. That effect is called the tilt effect because it tilts real payments to the early the years of the loan.

Let us examine the most acute example. In 1981, interest rates where at 14.9%. An average-income household would have needed to devote 35.8% of its income to return an average FRM loan. In 2010, they would have paid 12.1% of their income if they had kept their initial loan. If they had refinanced yearly at no cost, they would have paid 6.7%. The tilt effect can explain the difference between 35.8% and 12.1%. The fall of interest rates can explain the fall to 6.7%. If we analyze the data from all the years we can find borrowers that end up paying less than 5%.

When we analyze the loan payment to income ratio, we observe a great variance from the average (9.6%). While new borrowers pay 25.8% of their income, some of the old ones pay less than 5%. These results raise some questions about markets and housing policy, like entry barriers to homeownership or efficiency.