On Yahoo today (Front page of Financial home page) there was an article purporting to give advice on whether a retiree should pay off their mortgage. The advice given was not to pay it off if your could earn more on your savings than your mortgage rate.
This is OK as far as it goes, but there was no mention of the effect of inflation on real interest rates nor was there any mention of what the mortgage tax deduction does to your real interest rate. The deduction was mentioned only in passing and then only to say you would lose it if you paid off your mortgage.
The advice offered was next to worthless. Losing the mortgage deduction is never a reason not to pay of a mortgage, and should never be thought of in those terms.
A wise banker, he was president of a major bank in Colorado at the time, told me years ago, when i was a young man, that one should practically never pay off a fixed-rate low interest mortgage early. Those words have stuck with me. Although at the time i did not understand why. But i now realize that it has to do with inflation and the inexorable devaluation of currency over time.
In addition to the defaults Banks are currently saddled with they have loaned out billions that are now yielding a negative real rate of return. This is what happens when your have low interest rates and rampant inflation simultaneously.
In this situation virtually no one with a low interest fixed rate mortgage should accelerate payment on the principal.
When the APR is adjusted for both the mortgage deduction and the real rate of inflation, in just about every case the real interest rate will be negative. The bank is paying you to use their money.
Expect to start receiving correspondence, if you have not already, pointing out how much you could "save" by accelerating payment on the principal, or going to a thirteen payment plan.
P.S> Of course the money saved by not accelerating payments on the principal should be invested to yield enough to keep up with inflation. Not an easy task.
This is OK as far as it goes, but there was no mention of the effect of inflation on real interest rates nor was there any mention of what the mortgage tax deduction does to your real interest rate. The deduction was mentioned only in passing and then only to say you would lose it if you paid off your mortgage.
The advice offered was next to worthless. Losing the mortgage deduction is never a reason not to pay of a mortgage, and should never be thought of in those terms.
A wise banker, he was president of a major bank in Colorado at the time, told me years ago, when i was a young man, that one should practically never pay off a fixed-rate low interest mortgage early. Those words have stuck with me. Although at the time i did not understand why. But i now realize that it has to do with inflation and the inexorable devaluation of currency over time.
In addition to the defaults Banks are currently saddled with they have loaned out billions that are now yielding a negative real rate of return. This is what happens when your have low interest rates and rampant inflation simultaneously.
In this situation virtually no one with a low interest fixed rate mortgage should accelerate payment on the principal.
When the APR is adjusted for both the mortgage deduction and the real rate of inflation, in just about every case the real interest rate will be negative. The bank is paying you to use their money.
Expect to start receiving correspondence, if you have not already, pointing out how much you could "save" by accelerating payment on the principal, or going to a thirteen payment plan.
P.S> Of course the money saved by not accelerating payments on the principal should be invested to yield enough to keep up with inflation. Not an easy task.
