Up until about the mid-1980s, a homeowner who wanted to borrow against the equity in their home had to take out what was known as a “second mortgage.” And there was a stigma against second mortgages.
Then some enlightened bankers started thinking about homeowners and their equity differently. And so two of the most popular and useful products in the history of banking were born – the home equity loan and the home equity line of credit.
Borrowers loved that their equity wasn’t locked up until they sold their house anymore. Home equity quickly became a very popular money management tool.
People are using their mortgages differently today too. It’s not “make 30 years of payments and then burn the mortgage” anymore. People are much more likely
to see their home as an active asset and their mortgage as a money management tool as well. Some are less concerned about ever paying off their mortgage.
It’s a myth that bankers don’t want borrowers to pay off their mortgage loans. We’re delighted when people own their homes outright, if that’s at all possible.
The reality is that homeowners need money sometimes in large amounts for home repairs and improvements, medical expenses or college tuition, to give just a few examples. They like that mortgages are much more flexible and customizable – making a mortgage refinance often a very sensible way to get that money.
A homeowner who had 22 years left on their original mortgage wanted to borrow against their equity for a new kitchen. They wanted a fixed monthly payment so they figured they’d be getting a home equity loan. But – with mortgage rates still so low – they actually did better ratewise by refinancing into a new mortgage.
They didn’t even have to go out 30 years. They got a new 22-year loan with the cash-out rolled in. Their monthly payment is only slightly more than it had been.
Yes – they’re paying interest on the new amount. But paying interest isn’t a punishment (as some financial pundits also wrongly imply!). Interest is simply the price of borrowing money. Almost everything in life costs money. Borrowing money costs money too. The key is to get a fair interest rate – a ‘fair price’ – on a loan.
And since every mortgage borrower has the right by law to make extra principal payments, it is possible to take years off a mortgage and save thousands in interest.
In fact, paying as little as $200 extra a month on a 30-year mortgage would shave nearly six years off the term of the loan. An extra $100 a month would shave nearly 3 years off. (That’s always the smart way to handle borrowed money – looking for ways to pay it back as quickly as you can.)
Another borrower had gone with a 15-year mortgage because they wanted to challenge themselves to pay their home off very aggressively. When the challenge turned out to be a burden, they refinanced into a traditional 30-year loan. They can always pay their new loan ‘as if’ it was a 15-year but they don’t have to. It was very comforting to them to be able to get into a mortgage with a monthly payment that was a lot more affordable.
Sometimes homeowners in their 70s and 80s have paid off-mortgages, good cash flow and investments they want to leave in place. If they find they need money, it turns out that, for many, taking out a new mortgage can often be a very realistic strategy.
There’s so much more that a mortgage can do for you today. If you’re wondering about your specific situation, it’s definitely worth sitting down and talking with a local lender.
Nick Maffeo is the President & CEO of Canton Co-operative Bank in Canton. “Smart About Money” is a regular column he writes for the Canton Citizen. Have a financial question you’d like to ask? Email to firstname.lastname@example.org.