Mortgage Strategies

A mortgage is the largest financial obligation most households ever take on. The decisions made at origination — term, rate type, down payment, points — determine total interest paid over decades. Most of those decisions are made under time pressure during the home-buying process, with limited information, and are difficult to reverse. This page is the framework for thinking about each one clearly.

15-year vs. 30-year fixed

The most common decision and the one with the largest impact.

The math

A $400,000 loan at typical 2026 rates:

TermRateMonthly P&ITotal interestTotal paid
30-year6.5%$2,528$510,000$910,000
15-year5.75%$3,322$198,000$598,000

The 15-year saves $312,000 in total interest. It also costs $794/month more.

The case for 15-year

The case for 30-year

The honest answer

For most households, a 30-year fixed mortgage with optional extra payments is the more flexible choice. You retain the option to pay it like a 15-year by adding extra principal monthly, but if cash flow gets tight, you can drop back to the 30-year payment without penalty.

The 15-year wins when:

Down payment size

The 20% rule of thumb is more about avoiding private mortgage insurance (PMI) than about optimal financial structure.

The math

A $500,000 home with three down-payment scenarios:

Down paymentLoanRatePMIMonthly cost
$50,000 (10%)$450,0006.5%$250/mo until 20% equity$3,094
$75,000 (15%)$425,0006.5%$180/mo$2,866
$100,000 (20%)$400,0006.5%$0$2,528
$125,000 (25%)$375,0006.4%$0$2,346

Each additional 5% of down payment reduces the monthly cost. PMI elimination at 20% is a notable threshold.

When less than 20% makes sense

When more than 20% makes sense

A common error: stretching to put 20% down when it requires depleting the emergency fund. PMI is bad; being one car repair away from delinquency is much worse.

Points: should you buy them?

Discount points are upfront fees paid to lower the interest rate. One point typically costs 1% of the loan and reduces the rate by 0.25%.

The break-even calculation

A $400,000 loan: paying 1 point ($4,000) to reduce the rate from 6.5% to 6.25% saves about $66/month. Break-even: $4,000 ÷ $66 = 60 months.

If you stay in the loan more than 60 months (5 years), you win. If you refinance or sell sooner, you lose. The average mortgage in the US is paid off (sale or refi) within 7–10 years, so the calculation is genuinely close.

When points usually win

When points usually lose

Negative points (lender credits)

The reverse: take a higher rate in exchange for a credit toward closing costs. Useful if you are short on cash at closing and expect to refi within a few years anyway.

Adjustable-rate mortgages (ARMs)

ARMs have a fixed-rate period (5, 7, or 10 years) followed by adjustments tied to an index. The introductory rate is typically 0.5–1.5% lower than the equivalent 30-year fixed.

ARMs were broadly maligned after the 2008 crisis because aggressive ARM products caused widespread defaults. The conservative ARM products that exist today are different — they have rate caps, longer fixed periods, and underwriting that ensures borrowers can handle the post-fixed payment.

When an ARM makes sense

When an ARM does not

For most owner-occupants planning to stay 10+ years, the 30-year fixed remains the default.

Refinancing

Three reasons to refinance:

  1. Rate refinance — replace your loan with a lower-rate version
  2. Cash-out refinance — borrow more than you owe and take the difference in cash
  3. Term refinance — change the loan term (typically shortening from 30 to 15)

When a rate refinance pays

The old break-even rule: refinance if rates drop 1% or more. The actual rule is more nuanced: calculate total closing costs, divide by monthly savings, and compare to expected hold time.

A $400,000 loan refi from 7.0% to 6.0%:

If you will stay at least 2 more years, refi pays. If you might move or refi again sooner, the math gets close.

Cash-out refinances

Replace your existing mortgage with a larger one and take the difference in cash. Useful for major home improvements (the IRS still allows interest deduction in some cases) or debt consolidation. Generally not useful for general-purpose cash needs at current rate environments.

The transaction cost trap

Each refi costs $4,000–$8,000 in fees. People who chase every rate drop often pay more in transaction costs than they save in interest. Refinance when there is genuine, durable savings, not on small fluctuations.

Recasts

A mortgage recast — sometimes called re-amortization — applies a lump-sum principal payment and recalculates the monthly payment for the remaining loan. It does not change the rate or term.

Most lenders allow recasts after a $10K+ lump-sum payment, with a small fee (~$250).

When recasts make sense

When recasts do not

Paying ahead vs. investing

The single most-debated mortgage question: should you pay extra principal on a low-rate mortgage, or invest the same money?

The math

Mortgage at 5.5% (after-tax effective rate ~4.5% if you itemize and the rate is deductible). Long-run real equity returns historically average 6.5–7%. Investing wins on expected value.

But:

A reasonable rule

Mortgage rateAction
Below 5%Invest instead, almost universally
5–6%Judgment call; often invest, especially with long horizon
6–7%Closer call; may favor extra principal in late-payoff phase
Above 7%Pay ahead, generally

The "extra principal in the final years" framing is psychological. The dollars saved are largest in the early years (when balance is highest), but the certainty of being mortgage-free is most valuable as you approach the end. Many people split the difference: invest aggressively early, then add extra principal in the final 5–7 years.

Common failure patterns

Further Reading