The housing market is in a very different state than it was several years ago. Many people are walking away from their mortgages due to unemployment and an inability to pay, while others are watching their home values drop and mortgages fall underwater.
It’s tough for many to keep up with the changes of the mortgage industry, let alone think about keeping the home long enough to pay it off. With so much going on, does it make sense for those still in good standing to work toward paying off mortgage loans?
The Mortgage Industry and Homeownership
It’s tough being a homeowner today. After the burst of the housing bubble caused home values to come crashing down, people who had purchased their houses for $400,000 with ARM loans realized they could not afford to make their inflated mortgage payments not long after.
This, along with lenders mismanaging foreclosure procedures, resulted in millions of people losing their homes. Many who have not had the misfortune of having their homes foreclosed have still suffered from the value of their homes plunging to a level lower than the amount of their mortgage loan. In fact, recent numbers show that a whopping 28 percent of homeowners have underwater mortgages right now.
Many homeowners have had to abandon their homes to avoid falling further into debt. With home prices double dipping in May and expectations that they will drop further before hitting their bottom, the idea of keeping a home long enough to pay it off seems risky.
But as with most investments, there are pros and cons for those who want to pay off mortgage loans.
The Pros and Cons of Paying Off Your Mortgage
There are some benefits and downsides to keeping the mortgage long enough to pay it off. They include:
Benefits of keeping your mortgage (and eventually paying if off):
- Mortgage deductions: If you keep your mortgage, you have the opportunity to take advantage of the home mortgage interest deduction. Just keep in mind that lawmakers are looking to adjust the deduction downward so that some middle class families could owe thousands more in taxes per year.
- Your mortgage rate may be cheaper than other loans: As of May 2011, mortgage rates were near the lowest on record. Sitting at just 4.63 percent for the 30-year mortgage, compared with as high as 59 percent for some credit cards, some borrowers could benefit from putting more into debt that comes with higher interest rates.
- Take advantage of a lower rate: Because rates are much lower than they have been in years, if you qualify, you might be able to refinance your mortgage and take advantage of the below-5 percent rates before paying it off.
Downsides to paying it off:
- Homes are losing value: The housing industry isn’t expected to rebound for many years—if it at all. If you hold onto your mortgage in hopes of your home appreciating in value, you could be disappointed with the outcome.
- You may be missing out on other investments: By attempting to hold onto a mortgage for investment purposes, you may be investing your money in a home that is losing value when you could be making other types of investments with a better possibility of growth.
The housing industry is on shaky ground right now, leaving many homeowners uncertain about purchasing a home at all, so it makes since that some are proceeding with the idea of paying a mortgage off cautiously.
What If I Choose to Pay It Off Faster?
For homeowners who are in good standing, some might consider the pay off mortgage sooner option. There are definite benefits to taking this approach. One is that you get to lower your interest.
For instance, if you start a 30-year $200,000 mortgage at 7-percent interest on May 23, 2011, your monthly payments will be $1,330.60 with a payoff date of May 23, 2041. If you choose to add $100 to your payment every month, you new payoff date will be Aug. 23, 2035. If you add $200, your payoff date will be Dec. 23, 2031.
At the beginning of your mortgage, trimming six to 10 years off of the end may not seem like much, but when you’re ready to pay it off, you might be very happy that you made the choice.
What’s the downside to this arrangement? A Fed study found that homeowners who pay off their mortgage faster blow $400 by choosing to contribute more toward loan payments instead of contributing more to their retirement accounts.
The same study found that individuals making extra payments on the mortgage would get back 11 to 17 cents on the dollar by putting the money into a workplace retirement plan like a 401(k).
Ultimately, it’s good to use a mortgage payment calculator to take a realistic look at how paying off your mortgage (over the agreed upon loan term or sooner) could affect your financial well-being. Take time to see if refinancing is good for you and whether you actually want to remain in the house for the entire 30-year term.