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:

|------|------|-------------|----------------|------------|

| 30-year | 6.5% | $2,528 | $510,000 | $910,000 |

| 15-year | 5.75% | $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

- Lower total interest paid

- Lower interest rate (typically 0.5–0.75% lower)

- Forced equity build-up

- Mortgage gone halfway through the working career

The case for 30-year

- Lower required payment (more flexibility)

- The "extra" $794/month can be invested instead — historically, equity returns at 7%+ real exceed 6.5% mortgage savings on a risk-adjusted basis

- Inflation erodes the fixed payment over time

- Greater optionality if income drops or expenses rise

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:

- Income is high and stable enough that the larger payment is comfortable

- The household values the certainty of mortgage-free at year 15

- Discipline to invest the difference is doubtful

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:

|--------------|------|------|-----|--------------|

| $50,000 (10%) | $450,000 | 6.5% | $250/mo until 20% equity | $3,094 |

| $75,000 (15%) | $425,000 | 6.5% | $180/mo | $2,866 |

| $100,000 (20%) | $400,000 | 6.5% | $0 | $2,528 |

| $125,000 (25%) | $375,000 | 6.4% | $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

- High-cost-of-living markets where 20% requires depleting other reserves

- Strong income trajectory where you will reach 20% equity quickly

- Specific loan programs (FHA, VA, USDA, first-time-buyer) where lower down payments are integrated with favorable terms

- The opportunity cost of larger down payment is high (e.g., delaying entry into a rising market)

When more than 20% makes sense

- Comfortable doing so without depleting emergency fund or other priorities

- Higher down payment unlocks a meaningfully better rate (sometimes happens at 25%+)

- Comfort with reduced monthly burden outweighs investment opportunity cost

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

- You are confident you will hold the loan for 7+ years

- You are confident rates will stay flat or rise (no incentive to refi)

- Lower payment is genuinely valuable (cash-flow constrained)

When points usually lose

- You may sell or refi within 5 years

- Cash for points would be more valuable elsewhere (emergency fund, debt payoff)

- Rates may decline (refi opportunity within 2–3 years)

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

- You will own the home less than the fixed period (e.g., 5/1 ARM and you plan to sell in 5 years)

- The rate gap is significant (current cycles often see 0.75%+ savings)

- You are comfortable with the post-fixed adjustment risk

When an ARM does not

- Long-term home, no plan to sell or refi

- The fixed-rate gap is narrow (<0.25%)

- You are stretched on the introductory payment, with no buffer for rate increase

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%:

- Monthly savings: ~$265

- Closing costs: ~$6,000

- Break-even: 23 months

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

- You came into a windfall (inheritance, sale of another asset) and want lower monthly payment without refi costs

- You sold one home and want to apply the proceeds to your current mortgage

- Cash flow is tight and you need to reduce the payment without changing the rate

When recasts do not

- You are happy paying the current payment — adding the lump sum as a regular extra-principal payment achieves the same total payoff with the original payment timing

- The rate is high enough that refi to a lower rate would be better

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:

- Mortgage payoff is risk-free; equity returns are not

- "Risk-adjusted" math is unsettled; reasonable people pick differently

- Behavior matters — many people who say they will invest the difference do not actually invest it

A reasonable rule

| Mortgage rate | Action |

|---------------|--------|

| 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

- **Stretching to qualify.** Lenders will approve loans that consume 35–45% of gross income; this leaves little room for retirement saving, emergency funds, or surprises. Aim for total housing cost (PITI) under 28% of gross.

- **Focusing on rate without considering points and fees.** A "lower" rate with $10K of points may be more expensive than a higher rate with no points if you do not stay long enough.

- **Assuming you will refinance later.** Future rate environments are unknown. Pick a loan you can live with at the original rate.

- **Cashing out equity for non-investment purposes.** Cash-out refis to fund vacations or general spending convert unsecured-spending habits into secured debt. Bad pattern.

- **Ignoring property taxes and insurance.** Total monthly housing cost is principal + interest + taxes + insurance + (HOA, maintenance, etc.). Calculating only P&I understates the real cost.