§ 5%: 15-year fixed-rate loans share of home purchase applications in December 2009
§ 20%: 15-year fixed-rate loans share of refinance applications in October 2009
§ 9.1%: 15-year fixed-rate loans share of refinance applications in October 2008
§ 7.5%: 15-year fixed-rate loans share of refinance applications in October 2007
§ 4.46%: average rate, 15-year fixed-rate loans in mid-December 2009
§ 5.25%: average rate, 15-year fixed-rate loans in mid-June 2009
§ 4.99%; average rate, 30-year fixed-rate conforming loans in December, 2009
Paying a mortgage down early might not be a wise strategy at this time considering the future economic climate.
Since inflation will most likely rise in the future, interest rates will rise, which implies that over the long term the return on investments will be higher than the after-tax cost of borrowed money. The tax benefit from borrowing has its source in the tax code. Interest on mortgage debt is tax deductible. Thus, the after-tax cost of borrowing is lower than the pre-tax cost of borrowing. For example, a 4.46% interest rate for an individual in the 28% tax bracket will translate into a 1.25% after-tax interest rate.
The Bottom Line: Thus, in most cases, it’s financially advantageous to invest the surplus funds (i.e., the difference in monthly payments between 30 and 15 year monthly mortgage payments) into other investments (e.g., commodities, multinational corporations, etc…).
Source(s): WSJ, NYT, Bankrate.com