For the First Time, Outstanding Mortgage Loan Debt Tops $10 Trillion

Total outstanding mortgage loan debt has reached a new record high. Here's what that means.

Americans owe more money on mortgages than ever before. According to data from the New York Federal Reserve, outstanding mortgage loan debt at the end of December 2020 hit $10.04 trillion. It's never been above $10 trillion in the past.

Record high debt balances are normally not very good news, but there's a very good reason for this unprecedented mortgage activity. And, for many new homeowners, the decision to purchase a property will turn out to be a good one that helps increase their wealth.

Here's why so many people took out mortgage loans last year

Several factors account for the increased amount of outstanding mortgage loan debt last year, including pandemic-related lifestyle changes. A shift to remote work plus more time spent at home 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, one especially important reason so many people took out mortgages was the dramatic decline in mortgage interest rates. Rates hit 15 record lows last year, dropping to levels not seen in 50 years. Interest rates are so competitive, it's not surprising so many people borrowed to buy a home or refinanced their current loans.

Why a big increase in mortgage debt could be a good thing

Normally, a big increase in consumer debt isn't ideal. But mortgages are different.

Most people need a mortgage to buy a home, and homes can be a good investment. Homeowners tend to have more wealth than renters as they can build equity in their properties. As they pay down their mortgage debt and build equity, they acquire a valuable asset. Plus, if the value of the property goes up, so does their wealth.

Of course, this works only if people borrow responsibly. That means purchasing an affordable home well within their budget and not raiding the equity in it repeatedly to fund other purchases. It also means making sure they understand their home loan terms. Avoid loans with balloon payments or payments that could adjust upward beyond what they can afford.

There's no surefire way of knowing whether all the homeowners who took out mortgages last year made a financially prudent choice. But there's evidence to suggest many mortgage loans went to well-qualified borrowers. For one thing, the average credit score among people who secured new mortgages was higher than ever.

Hopefully, that's the case. That way, the millions of people who drove the aggregate mortgage debt balance above $10 trillion will end up happy with their decision to borrow.

For those who haven't yet purchased a home, mortgage rates have been ticking up 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 American mortgage balance.