Let me break it down for you. Paying off your mortgage is usually a smart move, but not always. If the yield curve inverts – meaning long-term interest rates fall below short-term rates – or if you’re facing a negative real mortgage interest rate, making that final mortgage payment might not be the best decision.
Here’s why: I’m someone who’s both paid off and still carrying mortgages. I could clear all my mortgages tomorrow, but I choose not to, and I’ll explain both sides of the argument to you without bias. Ultimately, what I want is for you to make the best financial choices to reduce stress, increase wealth, and boost happiness. Let’s dive deeper into why you should reconsider paying off your mortgage when the yield curve inverts.
The yield curve, which is normally upward sloping, paints a picture of the economy. When it inverts, it means long-term borrowers are getting the best deal. An inverted yield curve also indicates that we should stash away as much as we can in short-term money market accounts and treasuries.
The inverted yield curve also indicates the best relative risk-free return. Back in 2015, short-term treasury bonds and money market accounts were paying practically nothing. So, logically, people invested in riskier assets like stocks and real estate, which performed very well until late 2018. Now, with short-term rates higher than long-term rates, it’s wise to reconsider taking on unnecessary risk.
The value of liquidity also shoots up during an inverted yield curve. It doesn’t necessarily mean we’re heading for a recession, but every recession has been preceded by one. During recessions, companies cut back on spending and hiring, and countless people lose their jobs. Cash is king in uncertain times because it provides more options and allows people to ride out the storm.
Another advantage of having liquidity is the ability to snap up investment opportunities. You want to have a good chunk of your investable assets in liquid cash ready to pounce on opportunities. In a downturn, there are plenty of bargains, and you need the courage to invest when everyone else is running for cover.
While paying off your mortgage can give you a sense of relief, this peace of mind is often short-lived. The joy of paying off a mortgage or getting a promotion tends to fade after about six months. If the economy takes a hit, you might regret having your net worth tied up in one asset.
When the yield curve inverts, it’s a clear sign of an impending recession. If you start paying down extra principal toward your mortgage, your monthly mortgage payments stay the same, but your liquidity reduces. So, if a recession hits, you’re in a worse financial situation.
In a nutshell, less debt is always better, but if you’re still working and don’t have unlimited funds, it’s better to hold on to your mortgage or refinance it to match the point of inversion. An inverted yield curve doesn’t come around often, so it’s an opportunity to refinance your mortgage at a lower rate.
Today, the yield curve is steep and upward sloping. The Fed is planning to raise rates to manage inflation. With the economy recovering, wages growing, and corporate earnings strongly rebounding, real estate is a great investment opportunity. However, paying off your mortgage might reduce your motivation to hustle.
If you’re looking to invest in real estate, consider crowdfunding platforms like Fundrise and CrowdStreet. They offer opportunities to invest in real estate at lower valuations and higher rental yields, and they’re free to sign up and explore.
Remember to shop around for the best mortgage rate online. The more quotes you can get, the better. This will help you feel confident that you’re getting the best rate for your situation and make lenders compete for your business. In the end, paying off a mortgage might not be the best move when the yield curve is inverted.
