Mortgage Planning with Low Interest Rates
Mortgage interest rates have been quite low for many years. This should change the way you think and plan for your mortgage and your long-term financial strategy.
For some people, one of their top financial goals is to pay off their mortgage earlier than expected. This may be a reasonable objective, but it may not be the best long-term financial strategy. With mortgage rates as low as they are (and have been), paying off your mortgage quickly may be a financial mistake.
Let’s consider the current facts. You should be able to get a mortgage with a 15 or 30 year maturity in the 3% range, or even around 2.5%, depending on your specific situation (size of your mortgage, your credit score, etc.).
- If you still have a mortgage with an interest rate higher than these rates, you should seriously consider refinancing, if you plan to remain in your home for 5 years or longer. Please give us a call to discuss this further.
For sake of this example, let’s use 3% as your mortgage rate. For most taxpayers with a home and mortgage, some of your mortgage payments will be tax deductible as interest, so the after-tax cost of your monthly mortgage payment would be even less than 3%, say 2-2.5%.
Compare the mortgage interest rate cost of 2-3% to the long term 10% historical rate of return in the US stock market (with dividends reinvested). Even if future stock market returns are less going forward, say an average of 8%, that would still be far in excess of the mortgage interest cost.
If you can earn around 10% annually over a long period of time in the stock market, why would you make additional principal payments towards your mortgage? By paying down your low rate mortgage, you are giving up the opportunity to get much greater growth from your money by investing those dollars in the stock market.
Investing and stock market returns are not guaranteed. There is no way to know what returns you will get over the next 1, 3 or 5 years. However, if your mortgage is for longer than that, say 10-20-30 years, stock market returns of the past 50-100 years teach us that you will likely be more financially successful by investing money in the stock market than paying down your mortgage faster.
- If you invest in a well-diversified portfolio of stocks for the long-term, your investment returns should far exceed your mortgage cost of 3%.
- Investing the money provides you greater growth opportunities and greater liquidity. Once you pay down your mortgage, you don’t have use of that money, unless you borrow again through a refinance.
- While stock market returns can be volatile in the short-term, there has not been any 10 year period where a globally diversified portfolio has been negative. You may need to be patient during the down periods, which will certainly occur.
- Even if you invested money in the S&P 500 (US Large company stocks) in October, 2007, just before the Global Financial Crisis, which caused the S&P 500 to decline by 57% by March of 2009, if you remained invested in the S&P 500through July, 2021 you would have had an average annual return of 10% (with dividends reinvested).*
Our general recommendation is clear: you should not pre-pay or make additional principal payments to accelerate paying down your mortgage.
However, everyone’s financial situation is different. We recommend that you consult with us regarding your mortgage payment strategy. This is one of many services that we can provide to our valued clients, beyond providing investment advice.
We can assist you when you are purchasing a new home, to determine how much of a down payment and mortgage makes sense for you.
As you get older, we can help you evaluate whether a 15 year mortgage may make more sense than a 30 year mortgage. While a 30 year mortgage may be more financially advantageous based on the discussion above, there are very real psychological reasons that people like to know that their mortgage is paid off (or close to being paid off), as they enter the retirement phase of their life.
Times change. Interest rates change. My first mortgage was in 1990 with an interest rate of 10%. Today I’m in a different house, with an interest rate that is well below 3%.
Financial advice and strategies must be flexible and change as financial conditions, tax rates and other factors change. We are here and very willing to talk to you about these matters, to help you evaluate and make the best strategic decisions at the time.
Talk to us. We want to listen. We want to assist you, your family members and friends.
“A Study in the Virtue of Patience”, Nick Murray Interactive (Newsletter), September 2021. Data was obtained from https://dqydj.com/sp-500-return-calculator/, with dividend reinvested. This return data does not include any trading costs, fees of any mutual funds or ETF’s, or any advisory fees such as WWM charges.
WWM recommends globally diversified investments to our clients, not just investing in only the S&P 500 Index, which is comprised of US based large companies. The companies in the Index change over time. The Index data used in the essay above are for illustrative purposes only. See above for further disclosures.
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Let us know what you think. If you would like to contact us, please email or call Brad Wasserman (email@example.com) or Keith Rybak (firstname.lastname@example.org); or 248-626-3900 (or visit the Contact Us section of our website).
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