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Helping Underwater Borrowers Save Themselves: Accelerated Amortization
By Alan Boyce, R. Glenn Hubbard, Christopher Mayer, and James Witkin
- Proposal: The Case for Accelerated Amortization (draft 6/16/2012, PDF)
- Analytical Model: Accelerated Amortization (6/16/2012, Excel)
Recently a number of policymakers have proposed that the government encourage underwater borrowers to take advantage of low interest rates to shorten the amortization periods on their mortgages (and in many cases also reducing their monthly payments).
Such a plan would enable these borrowers to pay down their debt more quickly by taking advantage of mortgage rates that are even lower for 15-year and 20-year mortgages (currently about 3 percent and 3.5 percent, respectively) than for 30-year mortgages (currently about 3.8 percent).
Many borrowers can decrease the term of their loan by five years or more, saving money on their monthly payments while simultaneously getting out from being underwater much more quickly. We analyze the costs and benefits of a government policy that would offer to pay the closing costs for underwater homeowners who choose a shorter amortization period for their refinanced mortgage.