Going back a few generations there was very little credit extended to people interested in purchasing real estate. Fast forward to the first decade of the 2000’s credit was being extended to people who never had to prove their income and those that didn’t have a great credit history. We’re not sitting in the middle of the extremes, but let’s be cautious about mortgage debt. I recently heard an interesting statistic… 100% of foreclosures took place where people had a mortgage! All the more reason to work to pay your house off as early as possible if you can.
Years ago people paid off their homes in 5 or 10 years. That was pretty standard. While I get that homes are a lot more expensive now, it goes to show that the 30 year fixed mortgage, known as the standard, is not something that has been around forever. Lenders created it to help spread the cost of a home over a long timeline, and collect a lot of interest for their institution along the way. A 30 year fixed does make a home more affordable, but 30 years is a long time to pay for anything.
Interest rates continue to be a historic lows. With lower rates come lower payments. These lower rates are even lower when taking advantage of 20 year, 15 year, and 10 year fixed mortgages. I have clients who obtained a 1.75% 10 year fixed mortgage. A borrower pays a lot less interest on a shorter mortgage, and immediately starts paying down huge chunks of principle in comparison to a 30 year fixed. You absolutely have to sacrifice to pay your mortgage off over a shorter timespan, but the benefits of no payments as soon as 10 years down the line are amazing. Think about what having no mortgage payment would mean for you…. early retirement, ability to pay for your children’s college, a second home, more spending money, and in general… peace of mind!
A lot of people talk about how a mortgage offers a borrower a tax deduction for the interest. Something to keep in mind is that the deduction is never greater than the actual payment. Having no mortgage and no payment would allow you to keep a lot more money in your pocket in comparison to the interest deduction. Instead of taking the deduction you could make a charitable contribution and take the write-off that way!
One more thing to ponder… Making one extra payment each year on your 30 year fixed mortgage will cut seven years off the life of your loan. If you’re looking to get into a new mortgage please reach out to us for an introduction to a great lender! With interest rates as low as they are now, it’s a great time to explore paying off your home sooner rather than later.