Interest rates for a 30 year mortgage have increased dramatically in the past nine months. We saw lows of 2.25% earlier this year rocketing to a twenty year high of over 7% – a nearly 300% increase – breathtaking!
Over the past fifteen years interest rates had dropped to historic lows especially after the 2008 financial crisis and housing collapse and then through the uncertainty that COVID presented. Low rates were in order to keep the US economy afloat. But, COVID also had another issue lurking. The world economy was shut down and the supply chain was severely disrupted causing inflation to really heat up. Therefore, the FED had no other choice but to raise interest rates to cool off the economy so everything could get back in balance. This is why we have seen such dramatic increases in mortgage rates this year and they may not be done yet. But, there is no way to predict interest rates. We could actually see rates falling again in the near future if bond traders think the worst is behind us. In fact, perhaps that is why we have seen rather significant advances in bonds recently. Remember, if interest rates go down, bond prices go up and if interest rates rise, bond prices go down.
So now back to the question at hand. If you have an older mortgage (10 years plus) or captured a very low interest rate mortgage in the past few years, it likely doesn’t make sense to pay off your mortgage. Since you pay mostly interest first in a mortgage, an older mortgage may be to the point where you are paying mostly principal, therefore using the banks money. This tends to happen about half way through a mortgage. And further, since you are paying less interest, you are able to take less of a tax deduction for mortgage interest paid. And, since the standard deduction was increased a few years ago, mortgage interest may not even provide you with a tax deduction at all. Don’t forget the standard deduction is poised to go up another 7% next year resulting in even fewer able to benefit from the mortgage interest deduction.
For those who got lucky and locked in an extraordinarily low rate the likes of which we will probably never see again in our lifetime – don’t mess with it!
The total interest outlay for a $300,000 30 year mortgage at 2.25% is $51,160 compared to $471,719 for a 7% loan of the same amount and term. That’s over 400K more in interest! Certainly you can earn more than the 2.25% to 3.5% in your recently refinanced mortgage with your money you would otherwise use to pay off the mortgage.
But, there is one caveat to holding onto that low rate mortgage. If you have a stockpile of cash and find it hard to sleep at night with the mortgage debt hanging over you, PAY IT OFF! Sometimes peace-of-mind is more important than money!