Why Does Everyone Want Us to Pay Down Our Mortgages?

August 8, 2012 No Comments »
Why Does Everyone Want Us to Pay Down Our Mortgages?

You may have noticed lately that there’s been a major push by the powers that be to pay off our mortgages quicker.

If you look at most refinance initiatives, you’ll notice that the 15-year fixed (or any shorter term for that matter) is being touted above all else.

Heck, even 10-year fixed mortgages are being actively pitched by lenders as a great opportunity to own your home faster!

So instead of “slowly” paying off your mortgage with a traditional 30-year fixed, banks, lenders, and even the government are recommending that we shorten our loan terms and get out of debt quicker.

It Sounds Really Good…

The angle is simple: You can pay your mortgage in half the time without actually increasing your monthly mortgage payment.

You can also get above water a lot quicker if you’re underwater on your mortgage, which is good for the psyche.

I’m not sure why it’s good financially if you still owe 99% of the value of your home, but I digress.

Now at first glance, a shorter term with a similar payment amount sounds great.

If you’re currently paying $1,500 a month on a 30-year mortgage, why not switch to a 15-year mortgage if the payment is just about the same, thanks to the rock-bottom mortgage rates.

After all, you’ll save a ton of money in interest, and you’ll own your home free and clear a lot quicker.

If you pay mortgage insurance, you’ll also be able to ditch it sooner rather than later once your loan-to-value drops low enough. And of course, you’ll build precious home equity.

[15-year fixed vs. 30-year fixed mortgage]

Is Now the Best Time to Invest More?

At the same time, with rates so low, it’s really the ideal time to carry debt, when one could arguably do much better investing their money elsewhere at a better rate of return.

It won’t take a whole lot to do better anywhere else (other than a measly savings account paying less than 1%) if your rate is 3.5%.

There’s also plenty of uncertainty ahead for the housing market and the economy. If you think we’re completely out of the woods, I’d say you’re pretty optimistic.

Home prices could easily slide lower, especially in areas that have been hard-hit where the badness is still unfolding. And they might remain flat at best for years to come.

So if you get the opportunity to refinance your underwater mortgage, you may just want to take advantage of the lower payment (or fixed payment if you’ve got an ARM).

While a 15-year fixed can save you a ton in interest over time, it’ll also mean you’re fully invested in your home, one that you may have contemplated walking away from just months earlier.

If you’re making big payments each month and gaining equity, you will probably grow more attached to your home. This is the idea – they want you to want to stick around. Otherwise all those refis are a big waste of time and money.

But what if you can’t keep up with payments for one reason or another, and you get foreclosed on later. Or have to short sell? Those bigger payments won’t do much good, will they?

You may also have other debts with much higher interest rates that need your attention, such as your credit card set at 19.99% APR, or pretty much any other loan you have.

There’s also the issue of saving for retirement, your children’s college, and even a basic emergency fund.

The point I’m getting at here is that paying off the mortgage early (or faster than need be) isn’t necessarily right for everyone, even if the monthly payment doesn’t change.

This is especially true when mortgage rates are at unprecedented lows.

Read more: Is the 30-year fixed heading even lower?

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