Many of us have been looking forward to the day that we own our home free and clear. Making extra mortgage payments may have been a good financial decision in the past, but now it may be one of the biggest financial mistakes you could make. Perhaps it's time to postpone paying down the mortgage for as long as you can.
1. Ultra-low rates are ultra-rare.
We don't try to predict where markets are going, but homeowners have enjoyed historically low rates between 2010 and 2022, especially in 2020 and 2021. Rates below 3% were available for about only one year out of the last 50. There's no reason to believe that ultra-low rates will be back anytime soon.
2. To pay down your mortgage is a go down one-way road.
If you later decide that you need the cash for something--an emergency, starting a business, taking time off-- after having made extra payments, the only ways to pull money back out of your home equity is to sell your home, refinance your mortgage, or take out another loan. Either way, a new loan will be at prevailing market rates at the time. Compared to a mortgage from 2010-2022, you'll likely be paying higher interest on any new loans going forward.
3. You must still make full payments until the mortgage is 100% paid off.
If you don't have enough cash to fully repay your mortgage, then beware! Making extra payments won't reduce your monthly bill.
Avoid depleting your available savings if you can help it, even if it's for a good cause. Should you lose a job or have to cut back on hours, you'll wish you had more of a cushion from which to meet your monthly obligations.
4. You would be giving up a valuable tax benefit.
The home mortgage interest deduction lets you reduce your tax bill multiple ways. First, there's the deduction itself, which is basically a discount on the rate of your loan. Furthermore, your deduction might be large enough to make itemizing deductions worthwhile. This opens up whole new avenues of tax savings such as tax breaks for modest charitable donations.
5. Wall Street's loss is your gain unless you let them off the hook.
Behind every mortgage is someone who owns the debt and collects interest from you. It could be the bank itself, or investors who own your debt through mortgage-backed securities.
As with bonds and other fixed-income securities, the prices of mortgage-backed securities go down when interest rates go up. The reason is that a fixed stream of income loses value in comparison to newer investments that provide more income thanks to higher rates.
Mortgages from 2020 and 2021 have generated losses for investors so far. Investors are faced with the dilemma of selling low to buy a better investment or waiting the full term of the loan while missing out on higher rates elsewhere.
As the borrower, you are finally in a position of power! An early repayment would be quite the gift to investors. With the stroke of a pen you can instantly negate their losses. Returning that capital to investors gives them the means to invest in a higher rate loan without realizing their losses.
6. This is (probably) your once in a lifetime opportunity to safely invest with cheap, borrowed money.
You can't just mortgage your house and immediately make money by putting the proceeds in a savings account. Markets make sure that won't be possible, but homeowners lucky enough to have a low-rate mortgage in today's higher rate environment have a rare, non-renewable opportunity.
The concept is simple. Find an investment that returns more than the interest on your mortgage, and be ready to take on the risk of the investment you choose. No investment is perfectly safe, but some are pretty darn close.
For starters, you could try keeping your money in a high-yield savings account that is insured by the FDIC. If the bank stops offering you a high enough rate of return, move on. The relatively small risk here is your money being unavailable to withdraw in the event of both a bank failure and FDIC failure.
Similarly, you could lend to the US Federal Government by buying treasury bills, notes, or bonds. You could lock in rates by committing your capital for anywhere from one month to 30 years. Making this investment implies you trust the US Treasury is good on their word. US credit risk is so low that one to three month treasury bills are often called risk-free assets. Hopefully, our government's sterling reputation for paying its debt obligations continue far into the future.
Example: Alice is paying 3% interest on her fixed 30-year mortgage. Today, she could earn about 5.5% on a 1-month treasury bill. She decides to invest her money for one month at a time and earns a difference of 2.5% before income tax. The US Treasury repays Alice one month later. At that time, Alice can choose whether to repeat the process at the prevailing market rate. If rates are too low to reinvest, she can invest in something else or pay down the mortgage. If rates go up, she will earn more in the future. If Alice loses a job, she just needs to wait 30 days to tap into her savings. No matter what happens, as long as the government pays back its debt on time, Alice has fast access to her cash and doesn't lose any investment value.
Holding an ultra-low rate mortgage can make long-term bond and stock investing a good idea for some people. These investments have more risk and the potential for more gain. However, you should consider your situation and carefully plan your investments before attempting this move.
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