I asked one of my favorite clients recently, “Would you consider not paying down your mortgage so aggressively in order to improve your monthly cash flow?” Her eyes twinkling and determined, she smiled and shook her head slowly enough to let me know that further discussion of the point would be futile.
This kind of reaction to my pleas to rethink aggressive mortgage payments is commonplace and, to be fair, some of this is understandable. There is a lot of pride in paying off a mortgage. In many cases, clients can still remember when the final payment was 30 years away. Only through diligently making their monthly payments for almost half their lives were they able to approach the finish line of this financial marathon.
Beyond my conversations with clients, this urge to be done with mortgage debt is showing up elsewhere in the behavior of borrowers nationwide. According to the latest Freddie Mac Quarterly Product Transition Report, 27% of refinancing borrowers decided to shorten the term of their loan. When stuck with a high mortgage rate, paying down principal makes sense, but it is harder to make the case for this now that mortgage rates are relatively low. A leisurely survey of Freddie Mac’s Primary Mortgage Market Summary shows current rates for conventional 30-year fixed mortgages fell below 4% for every month in the first quarter of this year. Being aware that rates were as high as 17% in the first quarter of 1982 makes me contemplate the opportunities these low rates bring.
One way to bring these opportunities to light is to ask what you would do if you suddenly came into possession of $100K. Would you use it to pay down the principal of your mortgage or would you do something else? Historically, you would have to invest in the stock market to have a chance of offsetting the costs of mortgage debt with investment returns. But this environment is different. Now it is quite possible to beat the cost of mortgage debt without taking a lot of risk. As an example, since 2010, you could do it by using short and intermediate term bonds funds. (Click below link to see chart.)
So, what about this current trend of shortening the terms of mortgage loans or paying them off prematurely? Borrowers aggressively paying down affordable debt are missing an opportunity to have their money work more effectively for them. While paying off a mortgage speedily is undoubtedly satisfying, homeowners should consider the satisfaction achieved in knowing they have opted for a more financially beneficial option.