So, I did something that might seem a bit odd. I paid off my mortgage, even though it had a negative real interest rate. You might be thinking, “Wait, isn’t that a bad financial move?” Well, in this crazy high inflation environment, it might be. My mortgage rate was fixed at 4.25% for 30 years, but with inflation at 9.1%, the real mortgage rate was actually negative 4.85%. I had this mortgage for 15 years before I finally paid it off.
Now, you might be wondering why I’d do that. After all, if you have a mortgage with a negative real interest rate, you’d usually want to keep it as long as possible. Inflation is essentially paying it down for you. But sometimes, financial decisions aren’t just about maximizing returns. Let me explain why I decided to pay off my mortgage.
Firstly, I was unsure about the returns on risk assets. After a great 2021, I didn’t expect another fantastic year for stocks in 2022. So, when I compared a 5% expected return to a 4.25% mortgage rate, paying down debt seemed like a good move. As the year went on and stocks declined, I became less enthusiastic about them. But I kept buying as I usually do. After the Fed committed to raising rates aggressively, it seemed like risk assets wouldn’t recover until there were clear signs that inflation was slowing down. Thankfully, those signs are now here.
Secondly, I’d rather lose money to inflation than to asset price declines. When inflation is high, our cash loses purchasing power, so we tend to want to spend it sooner. But it’s still better to lose purchasing power due to inflation than to lose money from an investment that’s going down in value. Given my declining faith in the stock market, I decided to use my idle cash to pay down debt.
Thirdly, I had strong cash flow and received a large injection of cash. If you’re saving a lot or suddenly come into a lot of cash, paying down debt is an easy move to make. You don’t want to have too much cash sitting around for too long if you still have debt. I had excess cash and used some of it to pay down my mortgage.
Fourthly, I’m heading into retirement. It’s a good idea to pay off all debt when you no longer can or want to work. Once you pay off your mortgage, you free up cash flow equal to the monthly mortgage payment. It feels like a burden has been lifted.
Fifthly, my remaining mortgage balance was negligible. If your mortgage becomes an annoyance or an insignificant amount, you might want to pay it off. At the beginning of the year, my mortgage had a balance of about $50,000. With a loan-to-value ratio of only 9%, the mortgage started feeling like a pest. So, I decided to just pay it off.
Lastly, if mortgage rates and inflation rates are going lower, you may want to pay down your mortgage. If rates are going lower, your existing mortgage rate becomes relatively more expensive. Therefore, you would either want to pay down extra principal or refinance to a lower-rate mortgage.
Despite paying off a negative real mortgage rate being a suboptimal financial move from a returns perspective, it felt right for me. The feeling of having one less mortgage more than outweighs having a mortgage balance that’s getting inflated away. Now I can invest my excess cash flow in 100% passive real estate opportunities.
So, have you been paying down your mortgage with a negative real mortgage rate in this high inflationary environment? Why or why not? After paying off three mortgages, I’ve realized I like to pay mortgages off in about 10-15 years. Waiting for 30 years feels too long. Therefore, getting a 7/1 or 10/1 ARM is more optimal given the interest rate is lower. ARMs also motivate me to pay down extra principal.
