A mortgage is a kind of debt, which is secured with a specific real estate property as collateral, and which needs to be repaid by the borrower in a prearranged series of payments. Mortgages are also referred to as ‘claims on property’ or liens against property.
Businesses and individuals avail of mortgages to purchase homes or other real estate without paying the entire lump sum amount upfront for the purchase. The borrower will repay the mortgage loan along with the interest to the lender for a predetermined period of time until the entire loan and interests are paid off in full. The burrower then becomes the owner of the real estate property. If the mortgage is not paid by the burrower, then the lending bank can foreclose the property.
Different kinds of mortgages
A home buyer taking a residential mortgage pledges the home as collateral to the bank and gets the loan. If the home buyer defaults or stops paying the mortgage, then the bank can stake a claim on the property. During a house foreclosure, the lender can evict the home buyer and other tenants in the house, sell off the property, and use the money gained from the sale of the house to pay off the mortgage loan debt.
Mortgages are available in varied forms. In case of a fixed rate mortgage, the same rate of interest is paid by the borrower for the tenure of the loan. It is also referred to as a traditional mortgage. Almost all fixed rate mortgages come with a term of 15 or 30 years. There is no change in the monthly interest and principal payments and it remains the same from the first repayment to the final one. The payments do not change even if there is a rise in the market interest rates. If there is a significant drop in the market interest rates, then the borrower can get that lower interest rate by option for mortgage refinancing.
In an ARM or adjustable-rate mortgage, the rate of interest remains fixed for a brief period and then begins to change according to the market interest rates. The first interest rate is generally below the market interest rate so as to make the mortgage appear more affordable to potential borrowers. If and when the interest rates rise, it is possible for the borrower to be unable to pay off the increased monthly mortgage repayments. The mortgage may become less costly if and when there is a decrease in the interest rates. In both the instances, the interest rate tends to fluctuate after the first brief period.
Payment-option ARMs and interest-only mortgages are some other kinds of mortgages. They are not as common and mostly availed by skilled burrowers. A lot of homeowners fell into financial problems with such mortgages during the years of the housing bubble.
What is happening in the US mortgage markets?
As of July 2018, the mortgage rates in the US have become less volatile as compared to the big jump in early 2018.
The latest figures by Freddie Mac indicate that the average 30-year fixed-rate rose to 4.53% with a 0.4 average point. It may be noted that a point refers to fees that are paid to the bank/lender and it is equal to 1% of the total loan burrowed. This will was the first rise in almost 3 weeks. A year ago, the 30-year fixed-rate was 4.03%.
The average 15-year fixed-rate increased to 4.02% with a 0.4 average point. It was 3.29% one year ago. The average 5-year (ARM) adjustable rate increased to 3.86% with a 0.3 average point. It was 3.28% one year ago. Many financial professionals think that this trend will continue for quite some time.
The applications for mortgage in the US increased as of early July 2018. There was a rise of 2.5% in the market composite index as compared to late June. The market composite index measures the total volume of mortgage loan applications. There was a rise of 7% in the purchase index, but a fall of 4% in the refinance index. Mortgage refinancing made for just around 35% of all mortgage applications. It was this low way back in August 2008.
Experts have stated that refinancing has been adversely affected due to the increasing interest rates. Job growth and the economy are strong and it has resulted in an acquisition/consumption market. The rate of sales has however been held by low inventory.
Carrying mortgage debt into retirement: Right or Wrong?
More and more people in the US are continuing their mortgage debt into retirement. As per Fannie Mae, the percentage of mortgage-free retirees aged 65 to 69 fell by 10 percent to around 50 percent in 2015, as compared to 60 percent mortgage-free retirees of same age group in 2000.
Continuing with mortgage debt into retirement is however dependent on varied factors like tolerance to investment risk, and cash-flow requirements, etc. The choice to carry the debt into retirement may also be influenced by changes in taxation and your personal thoughts about financial security and debt.
The standard deduction has been increased under the new taxation rules, but there have been reductions in certain housing-linked deductions. In 2018, a married couple can avail of a $24,000 standard deduction along with $1,300 per spouse aged 65 years or more. Thus, if both spouses are 65 years old or more, then they can avail a standard deduction of $26,600. Retirees who itemize deductions will have a cap of $10,000 on the write-off for local and state taxes, which is inclusive of house property taxes. Additionally, interest deduction on new mortgage debt which was previously $1 million has now been reduced to up to $750,000.
Thus in 2018, most retirees will probably switch from itemized deductions to standard deduction. Subsequently, they will lose out on mortgage-linked tax benefits as they will not be able to write-off the interest paid on the mortgage loan. Seniors who are near completion of repayment of their mortgages may not fret about itemizing as the remaining loan amount may not consist of sufficient tax-deductible interest.
If you are not going to take the tax benefit via itemizing, then it is a better option to pay off the mortgage debt. But before paying off the loan, you have to examine where that money will come from and the rate of return that it is offering.
If your investment portfolio has bonds that offer a 5 percent return and the interest for the mortgage is almost the same, then it is a better option to sell off those bonds and pay off the mortgage. If you have investments in stocks and securities that offer excellent returns, then use that money to pay off a part of the mortgage debt. In case you take your retirement accounts’ required minimum distributions, then use it to payout the mortgage debt.