Mortgage delinquencies are rising: How to pay off the loan

According to data from the Mortgage Bankers Association, mortgage loan delinquencies on 1-to-4-unit homes rose 38 basis points year over year. High inflation and mortgage rates may strain Americans' ability to pay off their mortgage loans, so what are some of the best ways to do so?

University of Pennsylvania Wharton School Professor of Finance Michael Roberts joins Wealth! to discuss the rise in mortgage delinquency rates and how Americans can pay down their mortgages.

Roberts outlines some of the first steps in getting mortgages under control: "First, what I would do is I'd rank my debt by cost because we need to think about paying off a mortgage in a broader context. So think about all the debt you have: credit card, auto loans, student loan, as well as your mortgage and rank it from high to low... The second thing you need to do is figure out what you can earn safely on an after-tax basis in terms of investing. Because what we're really thinking about is we're taking every extra dollar and asking, should I use this to pay down debt or should I invest it?"

For more expert insight and the latest market action, click here to watch this full episode of Wealth!

This post was written by Nicholas Jacobino

Video Transcript

In high inflation interest rates.

It's a double whammy for your fanny here.

It's weighing on homeowners out there and the delinquency rate for mortgage loans on one to four unit homes that increased to 3.94% of all loans outstanding at the end of the first quarter of 2024 that is up six basis points from the fourth quarter of 2023 and up 38 points from a year ago.

That's according to Mortgage Banker Association's National Delinquency survey.

So, in this economic environment, how should you go about paying off your mortgage?

Joining me now is Michael Roberts, University of Pennsylvania, the Wharton School professor of finance.

Great to have you here with us first and foremost.

I mean, there's some people out there that just say if they have the means, should I just pay this entire thing off right now?

And what are the pros and cons of doing that?

Well, great to be here with you, Brad.

Um So it's, it's really a question of whether or not it makes financial sense to pay off that mortgage.

So there, there's some steps or a train of thought by which consumers can go through to determine whether or not they should use extra money to pay down that mortgage.

Uh beginning with is this my highest cost of debt?

Right.

That's the great beginning point.

I mean, there are a lot of people out there that are trying to think about the, the tips that they receive often for paying down the mortgage.

What what are some of your top tips for having a strategy for paying down the mortgage?

Ok, so, so let, let's try and just break it down real simply.

Um First, what I would do is I'd rank my debt uh by cost because we need to think about paying off a mortgage in a broader context.

So think about all the debt, you have credit card, auto loans, student loan as well as your mortgage and rank it from high to low.

So that's the first thing you need to do.

The second thing you need to do is figure out what can I earn safely in on an after tax basis in terms of investing?

Because what, what we're really thinking about is we, we're taking every extra dollar and asking should I use this to pay down debt or should I invest it?

And if I can earn more investing it and I should do that.

Uh So if I have a mortgage that's 3.5% that I got four or five years ago, and I can earn 5.5% on treasuries.

I'm not so sure even on an after tax basis, it makes a lot of sense to be paying down that low rate mortgage.

On the other hand, it's 7% today.

I try and get rid of that as quickly as possible.

Again, after I take care of higher cost debt, namely credit cards, auto loans and possibly student loans.

What if there are homeowners that are thinking about when the fed starts cutting rates, if there's going to be the opportunity to refinance and then they're looking at a different type of, uh, regular payments that they could be making to pay down their mortgage.

Should people be waiting for that brad?

You know, I just don't think consumers should get in the habit of trying to time, uh, interest rates any more than they should get in the habit of trying to time the stock market.

Look, I mean, the fed committed to three interest rate cuts this year just six months ago and now that's coming under question.

So II I, I'm not sure, uh, it's in consumer's best interest to be strategizing about where future interest rates are gonna be.

Rather just focus on that simple trade off between.

Where is my money best spent paying off high interest rate debt or earning a higher rate of return again, assuming that that rate of return is safe because you have to pay off your debt.

The stock market doesn't have to pay you.

Certainly, just lastly while we have you here, how does age age factor into the decision to pay off mortgage?

Yes.

So that, that's a great question because once we get older as I'm experiencing myself, all of us are Michael, it's inevitable.

I know.

Don't remind me.

Um, once we lose that labor income, right, then debt becomes much more precarious.

So trying to pay it down gradually over time and getting rid of it as we move into our retirement years, I is definitely a good strategy.

The question is, how quickly do we want to pay it down?

And, um, remember if you have all your wealth locked up in a house because you paid off your mortgage really quickly and you didn't save, that's very risky.

Right?

All your wealth is tied up in a highly, a liquid asset, a highly, a liquid risky asset.

And God forbid you have an emergency where you need some cash.

It's very hard to extract money out of a house, much easier out of some sort of liquid uh investment like bonds or stocks.