While most investors are distracted with 1 percent stock market moves, a fixed rate mortgage at today's rates may do more for your financial future. The yields on Treasury bonds continue to plummet, bringing lending rates down with them. Bond barons such as PIMCO's Bill Gross bet against the Treasury bond using the heft of his quarter-trillion Total Return fund, only to be whipsawed by a price increase.
Rather than gnash your saver's teeth at puny yields, take advantage of them from the borrower side by locking in historically low fixed mortgage rates. Many of you will find 30-year mortgages to be the most attractive. With rates close to 4 percent for conforming mortgages at low costs, it's hard to imagine them continuing their slide. With a $300,000 mortgage, this translates to a monthly payment of $1,432, not including property tax and insurance.
If you find yourself in a secure financial position, there is an additional option that harkens back to the time when six kids could fit in a station wagon: the 15-year mortgage. Rates trounce those of the 30-year with 3.25 percent available with some lenders. No doubt it's a significant bump in your payment, $2,108 a month for the same $300,000 mortgage. Gulp! Why would you want to do that?
The answer is forced savings and reduced interest. Many embrace mortgage interest, rabidly pursuing it as one of the beefiest federal tax breaks. Those who maximize tax breaks by paying more interest are letting the tax tail wag the dog. No tax-adjusted formulas can save you from the conclusion that you save money by paying less interest.
While the $2,108 payment looks higher at first with the 15-year mortgage, $1,296 of that is toward principal. Three years down the line, $1,424 of your payment is principal pay down. In contrast, when you are three years into the 30-year mortgage only $486 out of your $1,432 payment goes toward principal.
The 15-year mortgage is not for everyone. You need to be very financially solid with ample income and your job situation should be secure. All other debt should be paid off. You should set aside greater emergency savings to cover unexpected breaks in employment. It's best for people whose income makes their current mortgage easy to cover.
Many of my colleagues rail against this advice, saying that you can earn far higher rates of return on your investments than you will save with your mortgage. They argue the tax breaks make 30-year mortgages available at 3 percent adjusted for the tax benefit. It's undeniable that history demonstrates that average total returns of a conservative portfolio have exceeded this rate.
On the other side, you can quibble that the mortgage interest tax break may fade to black with impending tax overhaul. Or that it's of dubious value to high income earners who may see their deductions phase out through the AMT or other means. Also, earnings on investments are taxed as well and few people have the discipline to invest the difference between the two mortgage payments.
The strongest argument for the 15-year mortgage may be behavioral. Rarely do I meet a person who regretted their decision to take on a 15-year mortgage with ample reserves. With a short mortgage, a paid off house seems within reach. In my experience, once that happens their tolerance for the ups and downs of the market improves markedly. Ironically, taking the financial conservative stance of a 15-year mortgage can steel you to be more aggressive with your portfolio. That may be your ticket to financial independence.
Dave Gardner is a certified financial planner with a practice in Boulder and is the president of Alliance of Cambridge Advisors, a national organization of fee-only financial planners. He can be reached through his website atyellowstonefinancial.com.