For people who got cheap mortgages, less than 3% not long ago, instead of paying off a home, now could take the money and invest all of it in treasuries and earn, pretty much risk free, a profit with treasuries easily over 3% (3.58% for 30 years, 39% for 2 yrs).
I don’t think that has been common in my life time. For a few decades rates simply were going downward and now just steadily upward.
I saw one financial manager who expects a low nominal 3% return on US stocks yearly over the next decade. Obviously on the pessimistic side.
rate risk. Treasury Bonds may have the full faith and credit of the US government backing them up, but the long-term bonds are still subject to market forces when it comes to pricing. In a rising rate environment, you would have to hold until maturity to get your full principal back, assuming the government continues to pay its debts as expected.
payer risk. The government has repeatedly run up against debt ceiling issues, and while it has found ways to keep current on its debt payments, there’s always a chance it could fail to do so in the future. Of course, if that happens, we probably will have bigger problems on our hands…
taxes. Interest paid on treasury bonds is taxable at the federal level. You only benefit from mortgage interest deductibility if you itemize. That asymmetrical tax treatment means that you need to beat your interest rate on your mortgage by enough to make up for your tax costs for that to work in your favor.
cash flow timing. Mortgage payments typically include principal as well as interest payments, while bonds typically only pay interest until maturity. As a result, either you invest via a treasury ladder (in which case, it’s less likely that the shorter term bonds are adequately covering your interest) or you’ll still have to come up with the cash flow to cover your principal payment even if your treasury interest payments cover your mortgage interest payments after taxes.
In a rising rate environment, you would have to hold until maturity to get your full principal back.
That should say “get the full bond face value back”. That could be more or less than your initial investment amount, depending on the price you paid for the bond.
For people who got cheap mortgages, less than 3% not long ago, instead of paying off a home, now could take the money and invest all of it in treasuries and earn, pretty much risk free,
That’s why so many of us were pounding the table a couple years ago, telling people to buy with a 30 year fixed rate mortgage, or refi to a new one. I told all my kids to refi, thankfully they did.
I got a 2.5% rate, 2 of the kids got 2.25%.
UFB Direct currently pays 2.61% on their savings account.
I refinanced to a 15yr fixed rate back in 2017. I tend to lean towards fixed rates at the shortest term I can afford. There are times the monthly payment has stretched my limits but I am on track to pay off my mortgage about the same year as I plan to retire.
Fuskie
Who notes even with inflationary pressure on the mortgage market, the average 30-year fixed rate is still less than his original 30-year fixed mortgage rate back in 1995…
Premium Home Fool: Ask me a Foolish Question, I’ll give you a Foolish Response! Ticker Guide: The Walt Disney Company (DIS), Intuit (INTU), Live Nation (LYV), CME Group (CME), MongoDB (MDB), Trip Advisor (TRIP), Vivendi SA (VIVHY), JFrog (FROG), Virgin Galactic (SPCE), Axon Technologies (AXON), Blackbaud (BLKB), StitchFix (SFIX) Disclaimer: This post is non-professional and should not be construed as direct, individual or accurate advice Disassociation: The views and statements of this post are Fuskie’s and are not intended to represent those of The Motley Fool or any other sane body Disclosure: May own shares of some, many or all of the companies mentioned in this post: https://tinyurl.com/FuskieDisclosure Fool Code of Conduct:https://www.fool.com/legal/the-motley-fools-rules.aspx#Condu… Invitation: You are invited to interactively watch Motley Fool Live online television: https://www.fool.com/premium/live/ Call to Action: If you like this or any other post, Rec it. Better yet, reply to it. Even better, start your own thread. This is YOUR TMF Community!