No. of Recommendations: 3
Real example of why not to pay off your mortgage.
Depending, of course, on what your current mortgage interest rate is.
Federal Home Loan Bank bond with coupon of 5.89% and a maturity date in May 2045. First call date May 2026.
Or 20 Year Treasury at 4.86%
If you have a mortgage below 4.5% and are thinking of paying it off, don't. Instead put that money in one of these.
No. of Recommendations: 9
If you have a mortgage below 4.5% and are thinking of paying it off, don't. Instead put that money in one of these.
These numbers are not quite correct, because of taxes, and because of the current tax law. For example, my mortgage is 4%. If I buy a 20-year treasury bond at 4.86%, then I will receive interest twice a year, and I will pay 24% in taxes on that interest (and in some years even 32% or 35% depending on income that particular year). So my effective return is likely to be 3.69% in 2025. That's less than the 4% mortgage. For the FHLB bond at 5.89%, the numbers are a little better at 4.48% effective return. But it's really moot because I only have a few months left on the mortgage anyway.
I do however regret not doing a large refinance with a substantial amount of cash taken out, back when rates were under 3%. We discussed it here, and I even discussed it with my wife, but she was uneasy about it (understatement), and I already had un-deployed cash sitting in an account, so we didn't do it. Partially using my advice, one of my siblings refinanced around then and they now have a 2.75% mortgage rate for the next 13 years or so.
No. of Recommendations: 4
I think even if the mortgage is costing you a bit over the interest you are earning on the cash you are holding, it still is a good idea to have a large pot of cash for emergencies depending on your overall financial situation.
Someone years ago told me "People will give you all the money you want when you don't need it but when you really need it, often you can't get it or it comes with a huge cost."
Obviously if a mortgage is 8% and you can only make 4% it might be another story.
I messed up my timing with buying/selling houses in the 2019-2023 time frame and missed out on some bargains but sometimes other things in life get in your way.
Rich
