financial markets as volatile as they've been
lately, everyone's looking for a sure thing. Increasingly, savvy
homeowners think they've found it, and the latest trend has them
putting more of their spare cash toward what once would have been
an unheard-of "investment": getting their mortgages paid off
A world turned upside down
It says a lot about the investing environment we're in that even
with mortgage rates at record lows, people are seriously
considering ways to pay down their mortgage debt
. In the past, when interest rates fell, most homeowners rushed
to refinance in ways that
pulled out additional equity and made the most of
over the long haul.
Instead, as an article in
Wall Street Journal
over the weekend observed, homeowners are interested in getting
their mortgage debt paid off faster. Nearly one in three
borrowers who refinanced their mortgages during the first quarter
30-year fixed mortgage
with a shorter-term loan. In addition, 15-year mortgages have
gained in popularity even outside of the context of
Part of the appeal comes from a particularly wide spread
between rates on 30-year mortgages versus 15-year loans. At 2.83%
for 15-years versus 3.53% for 30-years, the spread is the widest
it's been in the 20 years or so that government mortgage-tracker
Freddie Mac has kept records.
But those lower rates come with a catch. In order to pay your
loan off in 15 years versus 30, your monthly payments must be
significantly larger. For a $200,000 loan at the rates mentioned
above, payments on a 30-year would be just over $900, while a
15-year would require payments of almost $1,365 per month.
The key, though, is that all of the extra $465 is going toward
repaying principal. So it's not as though you're actually losing
that cash; it's going toward building up equity. In addition,
you'll pay almost $1,500 less in interest during the first year
of your mortgage, with that extra $1,500 also going toward paying
A smart investment?
Getting out of debt definitely has appeal for many people right
now. But with
mortgage rates as low as they are
, should you be in any rush to get your mortgage paid down any
faster than you have to?
The answer depends on what you would do with the money. For
those who have money stuck in savings accounts or money market
mutual funds earning almost no interest, the chance to earn
essentially 3% in interest by paying down a mortgage early makes
But if you're willing to take the risk of putting that money
into the stock market rather than using it to pay down mortgage
debt, it's a much closer call. By keeping your mortgage higher,
you'll pay that roughly 3% in interest, but for many people, the
interest is tax deductible. As a result, you'd only need to find
investments that return 3% or more in order to end up ahead.
Dividend investors will point out that it's relatively easy to
get yields of more than 3% from a wide variety of dividend-paying
stocks. Although the irony of taking money you'd use to pay down
your mortgage and investing it in mortgage REITs
American Capital Agency
(Nasdaq: AGNC) may seem attractive, you don't need to stretch for
double-digit rates to meet a 3% bogey. You can even choose from a
number of blue chip Dow component stocks, with pharma giant
) and telecom rivals
) among the least volatile from a shareholder perspective.
Just remember that using money to invest in dividend stocks
rather than paying down a mortgage isn't a sure thing. While the
dividend cash flow may help you make your monthly payments, you
still have the risk that the stock price will go down, leaving
you behind on the deal.
Leaving aside the pure numerical arguments, though, it's
refreshing to see people taking responsibility for their finances
more prudently. As useful as leverage can be, using it
unnecessarily adds risk to your financial situation. If that
trend continues, then the average household should find itself
much more financially stable in the years to come.
All that said, you still need to invest some of your money
toward your other financial goals. Find out some great stock
names to consider for your portfolio by accepting this free
invitation to read the Fool's special report on long-term
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Fool contributor Dan Caplinger hasn't hesitated to make extra
mortgage payments when the will arises. He doesn't own shares of
the companies mentioned in this article. You can follow him on
Twitter @DanCaplinger. The Motley Fool owns shares of Annaly
Capital. Motley Fool newsletter services have recommended buying
shares of Annaly Capital. Try any of our Foolish newsletter
services free for 30 days. We Fools may not all hold the same
opinions, but we all believe that considering a diverse range of
insights makes us better investors. The Fool's disclosure policy
won't leave you without a roof over your head.
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