Scared of Your Mortgage? Here’s Another Perspective

April 29, 2021

Real Estate

It was definitely time to buy. Still, it’s hard to sleep when you’re about to borrow $500,000. Shloimy Gobioff knew that the only way he and his wife would ever buy a house was with a huge mortgage, but that didn’t make it any easier. At least they’d been able to make a large down payment and selected a 15-year mortgage. It was bad enough to carry the burden of debt for that long; enduring it for 30 years was out of the question.

Does Shloimy’s dark attitude toward his mortgage fit the facts?

Mortgages Are a Gift

Home mortgage loans are part of modern life, and many view them as difficult challenges, reluctantly borne. I know this may seem a little crazy to some, but I think home mortgages are fantastic in many ways—the bigger and longer dated the better. Without mortgages, very few people could buy homes, definitely not the spacious ones we enjoy today. And while a mortgage needs to be carefully considered, a reasonable mortgage on a well-selected home is far less risky and burdensome than some realize.

Compare to Never-Ending Rental Payments

First, while people fear decades of mortgage payments, in reality the true burden is our fundamental and permanent need for housing. Without this mortgage, Shloimy will need to come up with a lifetime’s worth of monthly rental payments! Rentals are generally costlier over the decades than mortgages are. But beyond that, while borrowers are “slaves” to their lenders, thanks to Uncle Sam, residential mortgages are the softest loan “masters” possible. In fact, they are so favorable that getting approved for a home loan is cause for celebration, not sleepless nights.

What Would Trump Say?

As a thought experiment, imagine you saved the life of one of Donald Trump’s children. As a reward, he offers you a 10-year interest-free loan of $1 billion. What kind of reward is that? you’d wonder. Just the thought of owing someone that kind of money is giving you heart palpitations. So you’d say, “Thanks, Mr. Trump, but can’t you just buy me a house or something?”

But wait a minute. You can take that billion and invest it in a 10-year US treasury bond. The risk is zero, and the annual income payout after taxes would be about $5 million! Such a reward would be most generous. As the real estate mogul knows well, a long-term 0% loan without onerous conditions and collateral requirements is a very valuable thing.

Uncle Sam’s Mortgage Gift

While Shloimy doesn’t have free access to Donald Trump’s balance sheet, the US government has designed residential mortgages as the next best thing. In normal circumstances, there’s no way a young couple with minimal income or credit could borrow significant sums, no matter the interest rate. Residential mortgage requirements such as proof of income and compliance with certain ratios are far less onerous than what any non-government-backed lender would request. The vast majority of home mortgages are backed by the Federal Government to help citizens become homeowners—a gift by the people for the people.

Zero Percent Mortgages, Considering Taxes and Inflation

While home mortgages aren’t offered at 0% rates, after accounting for inflation and taxes they pretty much are cost free today. (As an aside, in Norway and Denmark, banks have been offering 0% and even negative-rate mortgages! That’s another shmooze, though). Mortgage rates are extremely low now, hovering between 2 and 3 percent.

With inflation projected to run at 2% or more, plus the possibility of a mortgage tax deduction, the actual financial cost of interest is often 0% or less. (The technical estimated details, very roughly, are: home appreciation [3%] + value of the rent/living space [3%] – [3%] for taxes and maintenance = [3%] positive leverage, well above a real rate of 0%.) Over years and decades, as home prices rise, most homeowners will almost certainly make healthy profits on their mortgages.

Home Mortgages Are Protected During Crises

Home mortgages are also quite safe relative to other forms of debt. The most obvious safety feature of home mortgages is the fact that rates can be locked in for very long periods of time. In addition, as we have seen during the crash of 2008 and, more recently, during the corona crisis, the government is quick to assist mortgagors during national crises. Many of those affected by the crash of 2008 were able to get very advantageous loan modifications under the Obama administration’s HARP program. And during Corona, most needy borrowers were able to get six monthly home payments pushed off with no penalty.

Including Personal Ones

In cases of personal financial crises, too, such as job loss, illness, or family difficulties, there are laws that prevent banks from moving quickly to penalize mortgagors or foreclose. Also, friends, family, and askanim will probably endeavor to assist families that borrowed legitimately, not extravagantly, for basic housing needs and find themselves under temporary duress. So while it’s important to be a responsible borrower, Shloimy needn’t turn into a nervous wreck.

Liquidity Increases Safety

Ironically, those who view mortgages very negatively and use every penny they have to lower their loan balances are in certain ways raising the risk. Without cash liquidity, how will they pay their mortgage, whatever the size, during a rough spell? Having abundant home equity won’t help with a sudden medical expenses, job loss, or simcha shortfall. So while there’s merit to using the motivation of going debt free as a saving inducement, that can easily go too far. Easy and lengthy mortgage terms enhance cash flow and, in some aspects, reduce risk.

Don’t Get Me Wrong, Though

As regular readers know, I don’t encourage excessive risk or personal consumption, including buying “too much house.” Also, many young couples are better off delaying home purchasing for a while, despite low interest rates and rising home prices. And there’s significant menuchas hanefesh in knowing that the roof over your head is easily paid for. But since most couples will require large, lengthy mortgages, let’s approach the subject with seichel and positivity, not irrational fears.