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

There’s no question the global COVID-19 pandemic inflicted a tremendous amount of economic damage around the world and negatively impacted the finances of millions of people.

Ben Carlson of the blog A Wealth of Common Sense recently highlighted one silver lining from the pandemic that could provide a lasting financial boost to U.S. homebuyers.

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

Prior to the pandemic, 30-year mortgage rates were flirting with the 5% level. Even after a recent uptick, they are now averaging around 2.7%.

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

In other words, the hypothetical family in this scenario would potentially save $346 per month, or $4,152 per year, on their mortgage payment just from that 2% drop in interest rates.

Why It Matters: Of course, lower mortgage rates have also catalyzed a sharp increase in housing prices that offset the benefits of low rates for new homebuyers.

For Americans who owned homes prior to the crisis and were able to refinance at lower rates, Carlson said the long-term financial benefits could easily be in the tens of thousands of dollars or more. It could be much more if those savings are invested in a low-cost index fund, such as the SPDR S&P 500 ETF Trust SPY.

“I could take these savings, slap a rate of return on them and really blow your mind, but I’ll let your imagination do the work for you on that one. Of course, not everyone will take those savings and put them into a retirement or brokerage account, but some people will certainly have a greater ability to save more for their future,” Carlson wrote.

At the same time, the best use of that saved mortgage interest for many Americans would be to put it toward paying off the more than $3.1 trillion in student loan, credit card, auto and other debt that they owe, often at much higher interest rates than their 2% or 3% mortgage rates.

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