Americans owe more money on mortgages than ever before. According to data from the New York Federal Reserve, the outstanding mortgage debt at the end of December 2020 reached $ 10.04 trillion. It has never been above $ 10 trillion in the past.
Record debt balances are not normally great news, but there is a very good reason for this unprecedented mortgage activity. And, for many new homeowners, the decision to buy a property will turn out to be a good one that will help increase their wealth.
Start your journey to financial success with a bang
Get free access to the selected products we use to help us meet our financial goals. These fully vetted choices could be the solution to helping you increase your credit score, invest more profitably, build an emergency fund, and more.
By submitting your email address, you consent to our sending you money advice as well as products and services which we believe may be of interest to you. You can unsubscribe anytime. Please read our Confidentiality declaration and terms and conditions.
Here’s why so many people took out mortgages last year
Several factors explain the increase in the amount of mortgage debt outstanding over the past year, including lifestyle changes linked to the pandemic. The shift to remote working and the increase in time spent at home has prompted some Americans to relocate and become homeowners for the first time. This resulted in a bunch of new mortgage debt. Rising home prices also meant people had to borrow more if they wanted to buy properties.
However, a particularly big reason why so many people took out mortgages was the dramatic drop in mortgage interest rates. Affected rates 15 lowest records last year, falling to levels not seen in 50 years. Interest rates are so competitive that it’s no surprise that so many people are borrowing to buy a home or refinancing their current loans.
Why a sharp increase in mortgage debt might be a good thing
Normally, a large increase in consumer debt is not ideal. But mortgages are different.
Most people need a mortgage to buy a home, and homes can be a good investment. Landlords tend to have more wealth than renters because they can build equity in their properties. As they pay off mortgage debt and build equity, they acquire valuable asset. Moreover, if the value of the property increases, their wealth also increases.
Of course, this only works if people borrow responsibly. It means buying an affordable home while on budget. and do not repeatedly plunder equity to fund other purchases. It also means making sure they understand the terms of their home loan. Avoid loans with lump sum payments or payments that might adjust upward beyond what they can afford.
There is no sure-fire way to know if all of the homeowners who took out mortgages in the last year made a financially prudent choice. But there is evidence to suggest that many mortgages have been made to qualified borrowers. On the one hand, the average credit score of people who got new mortgages was higher than ever.
Hope this is the case. That way, the millions of people who have raised the total mortgage debt balance above $ 10 trillion will end up being happy with their decision to borrow.
For those who haven’t yet bought a home, mortgage rates have risen in recent days, but that’s no reason to be discouraged. Interest rates remain very low by historical standards. If you’re financially ready to buy a home, there’s no reason not to shop around and add your own mortgage debt to the growing US mortgage balance.