Mortgage repayment
May 19, 2015 6:23 AM Subscribe
Why would someone not pay off their mortgage?
An (elderly) friend of the family has reached the end of their mortgage, but is not going to pay it off. Why would doing this be a good idea? What are the benefits from leaving some debt open?
An (elderly) friend of the family has reached the end of their mortgage, but is not going to pay it off. Why would doing this be a good idea? What are the benefits from leaving some debt open?
Only your friend knows for sure, buuuuuuuut: your credit score is affected by many factors, some of them seemingly-illogical. Removing a mortgage MAY negatively alter a credit score. Or it may not - again, only your friend knows.
posted by julthumbscrew at 6:30 AM on May 19, 2015
posted by julthumbscrew at 6:30 AM on May 19, 2015
I'm confused by the question. Typically, mortgage payments are set so that if you make the prescribed monthly payment for the entire life of the mortgage, the last payment will fully pay off the debt. I'm the US, and there seem to be some other variations in the UK, but I don't understand what structure would allow the mortgage to "end" but a balance to remain. Perhaps a Brit can explain? (buoys in the hood is describing the process people often use to decide whether to pay off a mortgage early.)
posted by Mr.Know-it-some at 6:51 AM on May 19, 2015
posted by Mr.Know-it-some at 6:51 AM on May 19, 2015
(Perhaps someone familiar with UK mortgage law could begin by explaining what it means to "reach the end of your mortgage and not pay it off." In the US it's not even clear what that would mean.)
posted by alms at 6:51 AM on May 19, 2015
posted by alms at 6:51 AM on May 19, 2015
In many mortgage servicing agreements, the company collects monthly escrow amounts that are used to pay the annual taxes and insurance. This service may be valuable to someone who would not otherwise save the cash for those lump sum expenses. It could be a peace of mind type situation.
posted by Midnight Skulker at 7:00 AM on May 19, 2015
posted by Midnight Skulker at 7:00 AM on May 19, 2015
Only guessing here, but some mortgages are structured to end with a "balloon" or large payment - i.e., just paying the monthly amount does not pay off the whole thing, there is a big chunk at the end.
So this person may be reaching the "balloon" but rather than paying it off, she is refinancing the remaining balance into a new loan or an extension of the existing loan.
If that is all correct, the main reasons someone would do this are: (1) they don't have the funds available to pay off the balloon; or (2) they believe they can earn a rate of return with their money that is higher than the cost of the financing (buoys in the hood example).
posted by Mid at 7:12 AM on May 19, 2015 [2 favorites]
So this person may be reaching the "balloon" but rather than paying it off, she is refinancing the remaining balance into a new loan or an extension of the existing loan.
If that is all correct, the main reasons someone would do this are: (1) they don't have the funds available to pay off the balloon; or (2) they believe they can earn a rate of return with their money that is higher than the cost of the financing (buoys in the hood example).
posted by Mid at 7:12 AM on May 19, 2015 [2 favorites]
Possibly a balloon payment, but UK mortgages also customarily have mortgage exit administration fees.
posted by holgate at 7:19 AM on May 19, 2015 [1 favorite]
posted by holgate at 7:19 AM on May 19, 2015 [1 favorite]
Best answer: For the confused folks guessing above, in the UK it's relatively common to leave a mortgage open with a tiny amount of money outstanding (on which the provider agrees to charge no interest). All it does is provide relatively easy access to a line of credit secured against the house.
If the mortgage were to be closed, there would be substantially more hoops to jump through in order to borrow against the house again.
posted by emilyw at 7:34 AM on May 19, 2015 [18 favorites]
If the mortgage were to be closed, there would be substantially more hoops to jump through in order to borrow against the house again.
posted by emilyw at 7:34 AM on May 19, 2015 [18 favorites]
What emilyw says, and in addition many people coming to the end of a mortgage will be on flexible terms, meaning they can make a very small payment each month and extend the life of the loan that way.
posted by altolinguistic at 7:38 AM on May 19, 2015
posted by altolinguistic at 7:38 AM on May 19, 2015
There are interest-only mortgages where you don't pay off any of the capital. There are various reasons why you might take one. Also, endowment mortgages are (were?) essentially an interest-only mortgage accompanied by an endowment designed to generate sufficient cash to pay off the capital. You might reach the end of your endowment plan and choose to just keep the money, while continuing to pay the interest on your mortgage, if your lender was alright with that. Usually the value of the property will be more than enough to pay off the capital and leave you some spare if it ever came to that, so lenders might well be unworried.
In general I think it's better to pay off the mortgage, although at the moment interest rates are so low it generally doesn't cost much to keep one going. But if you needed a lot of cash it would make more sense to keep the endowment money rather than take a new loan which would be at worse rates than the continuing mortgage.
That's my theory; I am not an authorised financial adviser, my credibility may go down as well as up, etc etc.
posted by Segundus at 7:50 AM on May 19, 2015
In general I think it's better to pay off the mortgage, although at the moment interest rates are so low it generally doesn't cost much to keep one going. But if you needed a lot of cash it would make more sense to keep the endowment money rather than take a new loan which would be at worse rates than the continuing mortgage.
That's my theory; I am not an authorised financial adviser, my credibility may go down as well as up, etc etc.
posted by Segundus at 7:50 AM on May 19, 2015
Best answer: I know a man with diabetes who took out a mortgage to ensure he would have disability coverage and life insurance, which were apparently prohibitively expensive if bought standalone. Even though he and his wife have to make mortgage payments, they have the security of knowing that, in an emergency, the mortgage payments would be covered or the mortgage would be paid off. When they weighed this against other options, it made the most sense.
My parents keep their mortgage open because they were given the mortgage insurance based on their health in their late 30s, with the guarantee that their premium would never increase. So, based on an early 1980s rate, they are getting $250k of life insurance and the guarantee that the mortage payments would be made. I believe they are paying $10 a month or some crazy number like that.
posted by Chaussette and the Pussy Cats at 5:01 PM on May 19, 2015 [1 favorite]
My parents keep their mortgage open because they were given the mortgage insurance based on their health in their late 30s, with the guarantee that their premium would never increase. So, based on an early 1980s rate, they are getting $250k of life insurance and the guarantee that the mortage payments would be made. I believe they are paying $10 a month or some crazy number like that.
posted by Chaussette and the Pussy Cats at 5:01 PM on May 19, 2015 [1 favorite]
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Also not having to store the deeds yourself.
And if you can redraw, keeping the loan open can provide emergency funds for other purposes.
posted by lollusc at 6:29 AM on May 19, 2015