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Don’t Pay Down that Mortgage

Monday, October 15, 2012 posted by Tommi Crow

  Article by Boston Real Estate

Is your dream to own your home free and clear?

If so, join the crowd. More borrowers than ever are taking out 15-year mortgages in hopes of accelerating the day they can wave bye bye to the bank, the Globe’s Jenifer McKim reports.

While the traditional 30-year loan has long been king, 30 percent of borrowers during the second quarter opted for shorter loan terms with 15-year terms the most popular, the Globe’s Jenifer McKim reports.

That’s up from just 10 percent during the same time period in 2006, when the real estate market was at its peak.

And rock bottom interest rates have been one big factor – the piece offers up a Natick homeowner who found she could shift to a 15-year loan and save money given the drop in interest rates.

It is certainly an intoxicating dream at a time when debts, both personal and national, seem so crushing. Yet there are some potentially big pitfalls to this approach.

For starters, my bet is that our Natick homeowner is in the minority.

First, not everyone is in position to capture the lowest rates – you have to have some darn good credit these days.

And if you end up having to pay a bit more in order to pay down your mortgage faster, there is an opportunity cost here. The extra cash you are pumping into your mortgage is money that you could otherwise stash, tax-deferred, into a retirement account.

For that matter, if you have credit card debt, you should be paying that down first – the interest rates are likely much higher than on your mortgage.

Moreover, if you do run into trouble, such as losing your job or taking a hit to the paycheck, you have locked yourself into a format that may not be so easy to get out of. Good luck trying to refinance back into a 30-year mortgage at that point.

A Plymouth financial planner cited at the end of the piece actually had the best advice for homeowners eager to hasten the day when they make their final mortgage payment. He argues for making extra payments on a 30-year mortgage in order to accelerate repayment. If money gets tight again, you can just stopping paying that extra in.

This also gives you the extra flexibility to craft an approach that works from you, maybe putting a little bit more into both the mortgage and the retirement account as opposed to either or.

Makes sense to me, but how about you?   

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