In an environment where interest rates are climbing, having a solid strategy for paying off your mortgage can be critical, especially with inflation on the rise, which pushes up both mortgage rates and the Fed Funds rate.
Strategies for Mortgage Payment in Rising Interest Rates:
Being mortgage-free is typically a positive goal, but there are times when it makes more sense to slow down payments. For example, if you secured a low rate before rates began to climb, holding onto that low-rate mortgage might be more beneficial. This is because the cost of borrowing has increased, and your lower interest rate from earlier times becomes more valuable.
Example of Mortgage Payment Strategy:
Consider you locked in a 5-year adjustable-rate mortgage (ARM) at 2.5% before rates went up. If rates rise and the best you can get now is 3.25%, it’s more financially prudent to save rather than accelerate your mortgage payoff. Here’s how you could approach it:
– Conservative Approach: Save the difference between your old payment and what the new rate would require — say $201 monthly — then make a lump sum payment at the end of the ARM term if you plan to refinance or sell.
– Moderate Approach: Invest the $201 monthly difference in higher-yielding bonds, benefiting from their sell-off due to the rate increase.
– Aggressive Approach: Invest the monthly savings in the stock market, aiming to capitalize on a continuing bull market.
My Personal Strategy:
Given the principle that less debt is generally better, I still make extra payments on my 4.25% fixed-rate 30-year mortgage, although not as aggressively as before. Previously, I aimed to pay an additional $50,000 annually to be debt-free by 2020. Now, I’ve cut that extra payment to $25,000 annually, using the freed-up funds to invest, particularly focusing on real estate investments to potentially live mortgage-free.
Adapting to New Circumstances:
The recent rise in interest rates has shifted many investors’ strategies. For those who missed out on refinancing at lower rates, it’s crucial to stay adaptable and informed. Monitoring real estate and financial markets will help you make the most educated decisions about whether to pay down your mortgage faster or invest the extra funds.
Real estate remains a solid investment, especially in today’s market where remote work has increased home valuations. Exploring real estate crowdfunding platforms like Fundrise and CrowdStreet can offer diversified and direct real estate investment opportunities without the need for large down payments.
In summary, while paying off your mortgage early is traditionally sound advice, a rising interest rate environment requires a more nuanced approach. Assess your financial situation, risk tolerance, and future goals to determine the best strategy for you.
