Why Low Mortgage Rates May Be The Best Silver Lining For A Long-Term Pandemic

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There is no doubt that the global COVID-19 pandemic has caused enormous economic damage around the world and negatively affected the finances of millions of people.

Ben Carlson The Wealth of Common Sense blog recently highlighted one better side of the pandemic that could provide a lasting financial boost for US home buyers.

Number: Mortgage debt currently accounts for nearly 70% of the record $ 10.1 trillion in U.S. household debt, but the pandemic has sent mortgage rates plummeting to new all-time lows.

Before the pandemic, rates on 30-year mortgages stood at 5%. Even after recent growth, they now average around 2.7%.

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A typical monthly shipping charge of $ 300,000 at a 5% rate is about $ 1,610. The 3% rate on the same mortgage represents a monthly payment of $ 1,264.

In other words, a hypothetical family in this scenario could potentially save $ 346 per month or $ 4,152 per year on mortgage payments just because of the 2% cut in interest rates.

Why is it important: Of course, lower mortgage rates have also triggered a surge in home prices, offsetting the benefits of lower rates for new home buyers.

Carlson said that for Americans who owned pre-crisis homes and could refinance at lower rates, the long-term financial gain could easily be tens of thousands of dollars or more. It would be much more if these savings were invested in a low-cost index fund such as SPDR S&P 500 ETF Trust (NYSE: SPY).

“I could take that savings, set a rate of return, and really amaze you, but I let your imagination do all the work for you. Of course, not everyone will take these savings and put them in a retirement or brokerage account, but some people will definitely have more opportunities to save more for their future, ”Carlson wrote.

At the same time, for many Americans, the best use of the mortgage interest saved would be to pay off the more than $ 3.1 trillion in student loans, credit cards, car and other debt, often at much higher interest rates. than their mortgage rates of 2% or 3%.

Take Benzing: When prioritizing debt repayment, it is best to always pay off the debt at a higher interest rate first, even if it is not the largest principal. Credit card debt is a common source of debt at extremely high interest rates. In fact, according to CreditCards.com, the national average credit card interest rate is 16.1%.

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