One of the nagging questions the retired and the about-to-retire ask is whether to pay off a mortgage or continue to meet the monthly nut. The current market of ultra-low interest rates, less than 1% on money markets and savings, makes this a much easier decision than in the past.
And now, it’s also a way to get a guaranteed 4.5% to as much as a 6.5% return on your money.
Even if you are sitting on a very low rate mortgage, say 4%, there are also plenty of 5% and 6%’ers out there, too, but even at 4%, it is costing you that much annually to hold on to your cash, which is paying you nothing.
That’s 4% to 6% of a big chunk of money you could be putting in your pocket, with no risk. You just wouldn’t be giving it to someone else.
If you hold a higher rate mortgage, 5% or 6%, which a few years ago wasn’t considered a high rate, your return is obviously even higher. In fact, 6.13% in the 1990s and 2000s was considered a bargain. Not anymore!
When we could earn 12% and 15% a year from a good diversified stock mutual fund, or 7% on a 30-year Treasury, pulling money out to pay off a mortgage didn’t make any sense. You lost money on that deal.
But we can’t make those returns anymore and it doesn’t look like we will for a long time.
Looking at this from another perspective… Is there anywhere you can go today and get 4.5% to 6.5% annually on an investment backed by hard assets like real estate?
The answer is no, not even close.
Of course, the question of giving up your cash to eliminate a 4% to 6% loss every year is a function of how much emergency money you would have left in your accounts. This equation doesn’t work if you are left with little or no money to fall back on.
One way or another you will end up paying the principal on your home. The choice is paying a little at a time plus interest or a one-shot deal and keep the interest.
In just the first 10 years of a 30-year mortgage, every $100,000 in principal at 5% costs you over $45,000 in interest.
No matter what your cash situation, in this interest rate environment this deserves a hard look.