Mortgage Pay Down Strategy In A Rising Interest Rate Environment

Mortgage Pay Down Strategy In A Rising Interest Rate Environment

In a rising interest rate environment, you need a mortgage pay down strategy. With high inflation, mortgage rates and the Fed Funds rate have been rising. Therefore, you need a good game plan if you have mortgage debt.

Below is a case study on how to think about paying down your mortgage when mortgage rates are rising. You can use this older case study for a rising-interest rate environment in 2022 and beyond.

Mortgage Pay Down Strategy

Being mortgage free is generally a good thing. But there are times when you want to accelerate your mortgage pay down and there are other times when you want to leave it well alone.

With the aggressive spike in interest rates post election, it's now time to reassess whether paying down your mortgage quicker is a good idea.

Borrowers who took on debt and locked in a lower rate before the election are winning. Banks who lent people money before the election are losing because they could be earning a higher return today. In other words, the VALUE of the mortgage has risen for borrowers and declined for lenders.

When something rises in value, you do your best to hold on for as long as possible. Therefore, paying down your mortgage faster when your interest rate is fixed is a suboptimal move.

Example Of Not Paying Down Your Mortgage

Here's an example of a $500,000 mortgage that demonstrates this point.

5-Year ARM Interest Rate Lock Before Election: 2.5% = $1,975/month

5-Year ARM Interest Rate After Election: 3.25% = $2,176/month

Instead of prepaying down a fixed 2.5% rate, when the best a borrower can now get post election is 3.25% for the same loan, save the difference.

The most conservative strategy is to save the $201 monthly difference for 60 months and then pay down $12,060 in principal the last month the 5-Year ARM adjusts if you plan to refinance or let the mortgage adjust. If you plan to sell the property by then, you'll just keep the change.

A more aggressive strategy is to invest the $201 monthly difference in some now higher yielding bonds, given they have sold off due to the interest rate increase.

An even more aggressive move is to invest the $201 monthly difference in a mix of stocks and bonds. Finally, the most aggressive strategy for a lot of people is to invest 100% of the difference in stocks and hope the raging bull market continues.

Your decision will depend on your risk tolerance and financial goals. For those of you wondering about 30-year fixed rates, they've risen from around 3.625% to 4.125% post election. 

What Am I Doing?

Because I operate under the overarching belief that less debt is better than more debt, I will continue to pay down some extra principal on my 4.25%, 30-year fixed Lake Tahoe property mortgage that cannot be refinanced.

However, my original plan of paying an extra ~$50,000 a year in principal over the next six years to pay the sucker off by 2020 is now no longer happening.

Instead, I plan to reduce extra principal payments by 50% to $25,000 a year. The $25,000 in freed up capital will now be used to primarily focus on building a municipal bond portfolio in order to live for free in my primary residence.

I've also built a sizable $810,000 real estate crowdfunding portfolio. It earns me income 100% passively at a ~10% IRR.

I believe owning real estate in 2021+ is a wise decision. Funny money from stock gains will flow into real estate. Mortgage rates will stay low. Further, the value of real estate has gone way up since we're all spending more time at home.

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My Tailored Mortgage Pay Down Plan

I have a 5/1 ARM at 2.5% that is adjusting in July 2019. Although the interest rate is low, with only 25 months left of the fixed rate, I've got to come up with a plan to pay down extra principal payments so that if it were to adjust to 3.25%, I'll still be paying the same amount of interest.

Surprisingly, all I've got to do is pay down $19,000 of principal by July 2019 to maintain my same payment at 3.25% because I've already paid down $70,000. Plan done!

Finally, for my property with the newly refinanced 2.35% rate, I will no longer be paying down extra principal until the last month of the 5-year fixed term ending August 2021.

When the time comes, I will reassess the interest rate and real estate landscape to decide whether to pay down a lump sum, refinance or let the mortgage float.

Stay Fluid My Friends

The rise in interest rates post election proved temporary as investors realized many of Trump's economic policies aren't going through as quickly or as cleanly as first proposed (tax reform delay, health care reform delay, etc).

For those who missed the refinance window, you best try again and shop around for the latest rates. I do believe mortgage rates will eventually come down again as inflation subsides.

Pay attention to what's happening in the world and adjust your allocation of capital accordingly. I'll help keep you abreast through topical posts and my monthly newsletter. Don't be fixed in your way of thinking. So long as you have capital coming in, you have the luxury of figuring out how to best optimize your finances.

It's comforting to know that sooner or later, our mortgages will be paid off and we'll be able to drastically lower our cost of living or generate an increase in rental cash flow. We just have to decide how soon we want to experience that day.

Related: Why I Sold My Investment Property: Had To Live For Today

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Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you're looking for strictly investing income returns.

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Shop around for the latest mortgage rate. Check the latest mortgage rates online. You'll get real quotes from pre-vetted, qualified lenders in under three minutes. The more free mortgage rate quotes you can get, the better. This way, you feel confident knowing you're getting the lowest rate for your situation. Further, you can make lenders compete for your business. 

62 thoughts on “Mortgage Pay Down Strategy In A Rising Interest Rate Environment”

  1. Hey Sam,

    I’m 38 and working my way up to max out my Roth 401K and Roth IRA. Next one on the list is fully funding my 2 kids’ 529 plans so they have $100K each for college. Now, in the way :D is my 30-year mortgage @3.625% with outstanding balance $285K which will be paid off when I’m 67 (eeeeeks!) if I just pay monthly mortgage payments. Do you recommend prioritizing the mortgage over anything else? My financial advisor says no, which mathematically makes sense as my investments are on track to return 9%

  2. Hi Sam,

    Looking at buying a house and the lender offered me the option to “buy down” my interest rate. while my preference would be to not move, life necessity (wife, children) is causing a move for sanity (there is an value to sanity!).

    I see the payback period for buying down the interest being 7 years (without factoring in what the cash would have grown into over that same time period) and this move will hopefully be our last until the nursing home (barring job change) as it will allow us to have paid the house off well in advance of retirement, is in a neighborhood we love and meets current and future needs.

    What are your thoughts in general on buying down your interest rate? Even at higher rate we plan to put additional monies toward principal on a monthly basis but knowing what our set monthly expenses are and keeping that amount as low as possible also is quite attractive.

  3. Hi Sam, I just wanted to clarify on the HELOC and also ask a question which I haven’t seen come up in the comments at all. For background, I have had a very hard time getting a loan because I have started my own business. It has been a year of frustration on that front. I have a 70% real estate / 30% stock / 5% cash. Because of the difficulty in getting a loan I had to put more down on properties. For my primary residence I had to put 40% down and I have a 7-year ARM at 3%.

    I have a west coast investment property #1 for which I had to pay all up front and own outright. #1 is generating income via rent and has appreciated 15% as well. Another property became available in the same market and was an excellent deal with a motivated seller. I was able to get a below market deal but had to put 40% down and combine it with a HELOC.

    I am using the HELOC (from #1) with 0.5 minus prime rate where I pay interest for 10-year before it turns into an amortizing loan over 15 years. I am using the HELOC because of my loan situation and it is the only way at the present moment I can “use” equity from #1. I was planning on waiting a year so I could get a traditional loan but the deal came up now and I did not want to pass it up.

    My question is that I am using leverage via the HELOC to get two properties both can generate rental income after expenses to pay for the HELOC interest, cover the loan principal (not due for 10-year), and still generate income. I have no other debt. In this case does a HELOC seem reasonable and should I consider converting it when I can get a traditional loan?

  4. Arturo Felix

    Hello I have a two rental properties in Sacramento county. One is a 10 unit with a 5% 10 year ARM, with great cash flow. The other is a 3 unit on a 3.5% 15 year fixed with roughly 10 years left, also great cash flow. Currently I am living just south of San Francisco in Millbrae. I am renting an apartment as I cannot afford to buy a house here, small starter homes go for over 1 million.
    My question is should I refinance my tri-plex and pull cash out, my payment would go up $200 monthly, but my loan would be a 30 year fixed at 5.5%. Is that worth the 90K they would give me?

    1. I recommend NEVER messing with great cash flow properties. Leave them be, and focus on accumulating new wealth to buy a new property. If you can’t afford S. SF or Millbrae, then so be it for now. Hustle to earn and save more. Don’t take out equity from one great property and sink it into a much more expensive property with more debt at the current top of the market. Not worth it!

  5. Do you think people should wait until the end of 2018 to purchase? His selection for Treasury Secretary leads me to believe that we are going to have even more deregulation than anticipated. I’m worried that we’ll have a situation worse than 2008 on our hands.

  6. Hi Sam,

    Thinking of buying a house in the new year. Advice – how much do you lever up relative to your current net worth, as in what kind of pro forma personal debt to total capital ratio should you target?

    Say if you have $500K in cash savings – you buy a $750K house with a $250K downpayment / $500K mortgage. Assuming you have no other assets, you’re debt to capital ratio is 500 over 750, or 67%.

    Assume you have sized the mortgage in line with your future expected income stream. Is there a rule of thumb on something like this? Is ~70% too high? How about 50%?

    Thanks as always.

  7. With a mortgage it’s always very tempting to pay it down especially for those of us that hate debt and have extra cash flow but I agree we are in a good place to start putting money elsewhere. In a rising rate environment there is a certain amount of wariness on paper principal losses if you buy interest rate sensitive investments unless you arbing a debt or you have or have a strong view on where rates are going. I’m content to DCA as most of us reading this blog have a large cash balance already on hand and personally believe that you buy the rumor and sell the news (in this case the Trump presidency).

    The two biggest things I hate about real estate are liquidity and transaction costs. Liquidity will most likely never change as long as our culture of personal property doesn’t but I share your hope that the Realtor cartel is broken soon to lower transaction costs especially as their value added has come down remarkably in the past few decades. I personally believe it’s because of people rather than finances. Why did uber work better than Redfin at disruption? Because most people are friends with realtors and not taxi drivers.

  8. For me the decision of whether to pay extra on mortgages is more about personal cash flow management and stock market PE ratios than what interest rates are doing. When we have excess cash flow (after maxing out all tax advantaged space, achieving desired spending rates, having full reserve funds and having no special private equity or other investment opportunities on the horizon), the default plan is to either pay extra on our mortgage or invest in stock index funds in a taxable brokerage account.

    But my mortgage is fixed for 15 years at 2.75% and we are in the 33% tax bracket so our effective rate is even lower, near the inflation rate. Paying down the mortgage feels like an investment with a 0% real rate of return. Then again, stock valuations are frothy. Dumping even more money there that we already are within 401ks, Roths and our HSA isn’t compelling either.

    I’ve never considered a muni ladder or other investment, but I suppose I should look into one. Obviously if I could park $ in a money market or savings account earning more than our mortgage rate, that would be preferable to paying it off! What are muni bond rates doing these days?

  9. Go Finance Yourself!

    I like your plan Sam. No sense paying off cheap debt unless you are extremely risk averse. My plan was to keep investing in the stock market regardless of what rates do. If you have a fixed interest rate and don’t plan on moving anytime soon, then changes in rates don’t really matter. It’s like holding a bond till maturity. If you don’t plan to sell it, then changes in market value don’t matter.

    Besides, I’m still in wealth accumulation mode and believe I can get a better return on my money (long-term) through investments (stock, P2P, real estate crowd sourcing) than paying down my cheap mortgage.

  10. I recently refinanced and locked in a 30 year/3.25%. I dont plan on moving anytime soon if ever. Balance roughly 395K, based on what you said, am I better off NOT paying off principal and putting the difference into savings? I was thinking of at least paying the same amount as i was paying before I refi’d ($250), but that money could be put into brokerage account. Thanks for your thoughts.

    1. 3.25% is a cheap, cheap rate for a 30-year fixed. Now that rates have moved, I would not accelerate pay down.

      I don’t know your complete finances, so not sure what you should do. Building a cash hoard now is not a bad idea.


    I have two 30 year fixed mortgages, both at 4%. One is my personal residence and the other is a rental that currently cash flows. I have been saving for a down payment for another rental property, but have lately been wavering between another property and paying down mortgages. I think with interest rates rising, I am leaning toward buying another property once we start seeing a decline in demand. However, I’m not sure that is the right move. The idea of being debt free is very appealing to me, but my ultimate plan is to create enough passive income to retire comfortably. I don’t ever expect to sell my properties. I’d be interested to see what your thoughts are on this. Thanks and Happy Thanksgiving weekend!

  12. Wow thank you so much for commenting. That’s what I like about your financial view. You take psyche into account. Mentally, it has been irritating me to be getting 1900 in rent yet having around 2200 in expenses. However, I’ve ignored it and paid down extra principal religiously even when my wife was off from work for our son and previously thru some huge uncovered medical expenses. I feel my psyche wants to see this thru so that the day will come when rent goes right into our pocket. I made a plan where 2500 will get me close to the end in 4 years and like you said at that point pay a lump sum from that cash hoard. Thanks again for commenting

  13. Long time fan of FS and have been waiting for an appropriate post to ask any commenters their opinion on this situation:

    Have two mortgages. First one was bought at peak real estate high in suburb of NY in 2007. Current value of condo is 100kish less than original purchase price. Has a 4.5% mortgage rate and Currently renting it out and losing roughly 300 per month from break-even point. Currently live in another house with another mortgage. This has a 4% rate. Question: sell condo for loss? Pay extra principal to pay off condo in 4 years? Then we would clear 1900 a month in rent that would not be going to the mortgage.

    Here are current assets.

    Condo: 4.5% mortgage has 159K left on it ( 30 year fixed )
    House and current residence: 4% mortgage has 233,819K left on it ( currently living in this house) ( 30 year fixed)

    104K in ally account 1%
    107k in ally account 1%
    9k ally in account 1%
    ( i realize this is too much in 1% and need to invest)

    99k current value ( 30k profit from original purchase price ) Many dividend earners. This is just my stock picks over the years.

    403B account
    90k in balanced portfolio. 70k for wife in fixed 4%

    529 plan

    Wife and I both teach and each have 100k income with pensions and are in our mid 30’s with one toddler and another on way.

    Thanks in advance for any commenters. Happy thanksgiving weekend.

    1. Hi Mike, depends on how long you plan to hold your losing condo. Your losing condo is like my Lake Tahoe property. I don’t want to pay it all off JUST IN CASE I want to sell it. No use trapping money into an asset you plan to sell. As a result, I just pay down extra bit by bit in an amount that DOESN’T HURT my psyche and balance sheet. That amount is currently an extra $25,000 a year. Find your own number. My plan is that one day I’ll make so much, or have so much cash, or see such a small balance left on the mortgage that I’ll just pay it all off like I did my rental condo in SF in 2015.

      I’d chip away at your primary, or whichever house you plan to own the most since both rates are over 4%. With a pension and that much cash relative to your net worth, you are in a conservative financial position.

      Related: Target Net Worth By Income

    2. The condo doesn’t make a good rental – SELL IT. It doesn’t matter what it used to be worth; that’s a psychological problem for you, not a good mathematical reason to hold onto a sub-optimal investment. If you had whatever amount of equity is in the condo in front of you today, would you take out a $159K mortgage at 4.5% to buy it at today’s price so you can rent it out for a monthly loss? If you want a rental property, you can find much better ones.

      If you don’t want to sell it yet because you think it may increase in value in the short term for some reason, I would pay it off. Your 1% savings account will turn into a 4.5% guaranteed return and will simultaneously boost your cash flow big time. Not a bad situation to be in with baby on the way and other things to be occupying your time and money. You’ll get the cash back when you sell, after all. And having it paid off opens you up to being able to seller-finance it if you want or need to. That broadens your possible market of buyers to include newbie investors with little to put down and tenants with sub-optimal credit/cash. Maybe approach the tenant to see if he or she wants to become a homeowner?

      You’re right that you need to invest your cash, but with the market reaching 5 or 8 all time highs in the last month after stocks were already on the high end of historical valuations, I don’t think now is the time to dump lump sums into stocks, especially given how conservative you are. Paying off the condo and investing the newfound cash flow over time would be my personal preference in your situation.

      1. Elizabeth, thanks for your detailed comment. I agree that now may be a bad time to deploy cash into the market at all time highs. Most of my brokerage account in stocks was deployed during the meltdown in 2008. I like your idea of paying down the mortgage to free up cash flow. I just have to get the guts to do so. It is hard for us to deploy the cash because we needed it for some unforeseen major uncovered medical expenses and would have been destroyed if we did not have the cash on hand. This is causing our emotional side to holding onto the cash. That’s why I was leaning to a 4 year plan of paying extra principal that does not impact our lifestyle and then close to the end toss down a lump sum. This goes against math though as you stated. Thanks again for your comment and I really like your blog too.

        1. It’s a tough call for sure. I understand! I’m about to sell a rental condo myself and am torn about what to do with the proceeds. They will be almost enough to pay off another rental mortgage that’s fixed at 5% – so that seems like a no brainer. But our tax bracket is high and so the effective mortgage rate really isn’t bad. As Financial Samurai has pointed out, I could beat that effective rate with muni bonds in pretty short order. But my cash flow will be better (and I’ll save time/hassle monitoring muni yields and building a ladder) if I just pay off the loan. But then I lose the liquidity too…there’s no wrong or right answer, which is why the “pay off debt or invest” question is so prevalent. Good luck with whatever you decide! Oh, and thanks for checking out my blog. :)

    3. If the condo value has not bounced back yet, it won’t. You are now at the point of gambling on some large external event (Next Facebook sets up a campus down the road, oil gets discovered in town, etc) that is HIGHLY unlikely to occur. Real estate has bounced back to be above long term averages.

      I would sell the condo, and take the loss as a lesson learned. The money you save can be put towards other investment opportunities with higher probability of growth.

  14. I have until March when my annual bonus hits and I may get a tax refund as well. I’ll have to re-assess at that time whether I continue to put 1/3 of this annual windfall towards my mortgage (currently at 2 7/8%) or put it somewhere else.

    Until then, I’ll be watching and waiting!

  15. PatientWealthBuilder

    I’m a big believer in not paying down a mortgage but rather investing that money in the stock market. But my risk tolerance is high.

    The flip side is that when you have paid off a mortgage you are no longer obligated to make that monthly payment! What a great feeling. Also, this helps your credit. Sometimes the benefit of having a debt-free lifestyle outweighs the higher return.

    But for me, I’m trying to put as much as I can into stocks.

  16. This is a good reminder that changing times can call for adjustments to our financial plans. I paid down extra mortgage principal on several occasions myself this year but have slowed down. It will be interesting to see what happens in December when the Fed makes its rate hike decision.

    Happy Thanksgiving!

  17. Another Reader

    I’m thinking my HELOC, whose interest rate is based on the prime rate once the initial fixed rate period expires, might be the one to pay off first. The fixed period expires in January, and I can see it heading to six percent sometime next year. It might even make sense to put some of it on an extended 0 percent credit card, which, according to Chase, I can do by depositing one of their checks. Make minimum payments until the last payment and then pay it off. Meanwhile, throw other income at the remaining balance.

    Cash reserves look great in a low interest rate environment. Cash is a lot less attractive when it’s paying 1 percent and there is 6 percent debt out there.

    1. I don’t like HELOCs b/c it temps me to be undisciplined. HELOC rates are also much higher than normal mortgage rates. What’s yours? I’d definitely pay down your HELOC.

      1. Another Reader

        It’s at 4.25 percent but will go up to 4.75 percent at the end of the fixed rate period anyway because of the margin. Add in 5 quarter point increases in the prime rate and poof we are at 6 percent. It sits on top of a 3.125 percent conforming 30 year fixed which I am planning on paying off over the remaining 26 years.

        Since I have over 10 mortgages in my name, I only qualify to refinance my primary residence, not my rentals. I used the HELOC to pay off a high interest rate mortgage on a rental and to remodel a house I sold. The proceeds from the house sale went to pay off three high interest rate rental mortgages. We do what we can with what’s available to us…

  18. As a first time home buyer, I’m now stuck between a rock and a hard place with rising mortgage rates and rising home prices. The jump in mortgage rates equates to about a 5% increase in home prices (based on the jump in payment) across the entire country over a couple weeks. Very discouraging and I’m thinking about holding off on my purchase now til things cool down.

    1. Brian, where do you live? The jump in interest rates should negatively affect demand at the margin and slowdown price increases or cause prices to decrease. Be patient. Such moves in the markets takes time to play out ~6-12 months.

  19. Happy Thanksgiving Sam!

    For many younger people who already have a 30-year fixed mortgage in place, it’s better for them for hold on to that and put excess cash into other higher-yielding instruments.

    We shall see how rates play out in the next couple of month consider the market always over-react, I wouldn’t be surprised to see rates come down first before continue to steadily rise over time.

  20. One thing I don’t understand, maybe I’m missing something: why is it more worthwhile to build up a (possibly lower yielding) bond portfolio than paying against the 4.25% mortgage?

    Thank you and happy thanksgiving!

    1. The muni bond portfolio actually yields more than a 4.25% gross yield now based on my tax rate.

      The other reason is the desire for liquidity to take advantage of other investment opportunities on the horizon.

      The other reason is that a 4.25% mortgage is fixed for 30 years so nothing will ever change until it is paid off.

      The final reason is that the Lake Tahoe property is not a “winning asset” unlike my other properties. Therefore, it’s better to throw good money after good assets instead of good money after sub optimal assets.

      At the end of the day, paying down an extra $25,000 in principal a year on top of a $12,000 a year naturally amortizing loan is still better than nothing. You just don’t see any improvement in real cash flow until after the entire mortgage is paid off. all you see is an increase in the percentage of the mortgage going to pay down principal.

      What are some of the things you’re doing with your mortgage or investments?

      1. Thanks for the reply; the 4.25%+ yield sounds like a good deal.
        My mortgage is below 2% (Netherlands) and fixed for still almost 10 years, so I’m not paying any extra towards it. I’m still building up my portfolio so I’m investing with a quite aggressive strategy, mainly to individual stocks (US and Europe) and stock ETFs (recently started to buy into VFH). There’s only a small percentage in bonds and that’s all in PCY.
        European stocks (and properties) are getting cheaper for you guys; aren’t you keeping a half eye on them as an option?
        Next year I want to use the opportunity that mortgage rates are still very low in Europe and buy my first rental property.

  21. I currently have a 2.65%, 8-year mortgage that was originated in late 2012. I have less than 60K left on it and I am definitely not planning on making extra payments. Having said that, I am planning on selling the house next summer in order to downsize and get rid off high property taxes. We will wait and see how the interest rates and housing market will be around that time.

  22. Paid off the mortgage back in July. I am vey happy I did. My net after expenses increased dramatically after that. :)

  23. Your First Million

    I just want to mention something about the stock market hitting new all-time highs. Many economists and big investors are saying that we are just days, weeks, or months away from another financial crisis / stock market collapse like we saw in 2008 or maybe even worse. Others take a different stance and claim that this time is different for a variety of factors. Same goes for the real estate market… “this time is different because banks are being more careful about lending.”

    I read a quote yesterday that really got me thinking and I think people should really pay attention to it.

    “The four most expensive words in the English language: this time it’s different.”
    –Joseph Thanhauser, Chairman of Byrnam Wood LLC (global real estate firm)

    Now I certainly don’t have a crystal ball, but anyone with common sense can look around and see that things are definitely inflated. It would be wise to proceed with caution in my opinion.

    1. Ah yes caution. I just bought 1000 shares of caution just in case.

      The problem is what is cautious. Are bonds right now? Is real estate? Is cash for that matter? Sure cash is cautious but if you sit on it for a protracted period you end up getting burned by inflation and cautiously driving yourself off a financial cliff.

      I appreciate the sentiment but I couldn’t call it advice.

  24. Jack Catchem

    Happy Thanksgiving, Sam!

    I’m still going to be paying an extra $250 a month on my mortgage. The 4.25% 30 year loan will then be paid off the same year I’m eligible to activate my pension ( I’ll be 57). I’d like to push more cash that way, but am prioritizing the retirement accounts first.

    Now if I can sell my novel I get to hit two goals at once: 1) any cash goes to the mortgage pay down and 2) my daughters have a written record of my adventures in case of my untimely demise.

    1. Ah yes, leaving a legacy for one’s family and friends is nice through writing. I’ve been much more aware of that as I age, and try to be less incendiary!

      It just feels good to pay down extra principal here and there. A 4.25% guarantee return is hard to beat.

  25. I currently have a 3.35%, 30-year mortgage that was originated in March 2016. I normally don’t carry a mortgage since I hate debt. I am thinking about selling shares of a growth fund to pay down the mortgage taking advantage of the high stock market performance. I plan to pull the remaining amount ($190k) from a municipal bond fund which is losing money currently. I guess I just don’t have the stomach for market uncertainty given I plan to retire in 4 years. Is this a crazy move?

    1. For you it is not a crazy move. While you can maximize your personal wealth generation by keeping the mortgage debt it is best not to hold this debt if it makes you feel uncomfortable. Two primary reason, one you don’t feel comfortable and two if something in the markets go the way in the direction that you are fearing you are more likely to respond by making a bad financial decision. For instance if the muni bond market drops more significantly you are more likely to sell out of fear since you have a lower threshold for risk. Why not just sell out of the muni bond now pay off your debt and sleep well. Even though mortgage debt is a useful financial tool there is something to be said for being debt free.

      1. Thanks Nick! I put a sell order in this morning to pay off the mortgage. And, I feel better already. I’ll probably start holding cash until the crazy political environment settles a bit. I appreciate you taking the time to respond.

    2. Terry Pratt

      While personally I am risk-averse and would be inclined to throw surplus money at mortgage reduction – poverty tends to do that to people – doesn’t ‘rising interest rate environment’ suggest potential to achieve greater returns by investing surplus cash than by reducing mortgage principal?

    3. 3.35% on a 30-year has to be one of the lowest rates around. I would keep that for as long as possible, or at least wait and see. For example, let’s say 30-year fixed loans rocketed to 7.5%. If you paid it off, you wouldn’t feel that great. It would be like you lost a baby! Maybe not that dramatic.

      I’m buying muni bonds now, not selling. But at the end of the day, you should do what feels best for you.

  26. Happy Thanksgiving Sam. I think you’re probably right in this environment it makes a lot of sense to diversify into the municipal bond market instead of applying extra principal towards to mortgage.

    On the flip side, when I paid off my mortgage in 2012, while it wasn’t the smartest thing to do, it’s definitely nice knowing that I don’t have to make mortgage payments each month :)

    The price was well worth it knowing that I don’t ever have to think about a mortgage again. Not having the mortgage hanging around my neck has allowed me to make more chances in life which has sped up my FIRE timeline which I don’t think I would have been able to do otherwise.

    Thanks for sharing your perspective!!!

  27. We completed a refinance immediately prior to the election. We do have some extra cash right now due to some job transition activities related to my wife leaving the work force. Some of this is going to prepay mortgage but mainly because we are already maxing to our existing investment plan. The secondary reason is I’d like payoff to equal our retirement date 10 yrs from now. Both will be reached with the extra payoff in the next 2-3 weeks. After that items will go into a mix of bonds and stocks based on our normal plan.

  28. I just closed a 7/1 arm on my new Northern California property. There was a lot of debate within my family as to why I am not taking a 30 year loan to lock in the historically low interest rates. I calculated that I will be having $54,000 with the lower interest rate (2.85% vs 3.25%) and who knows what will happen in the 7 years. I have lived in 4 cities in 7 years and owned/sold 2 other homes. If I am still living in Northern California in 7 years, at the same home, then I can decide what to do. One option is to refinance into a 15 year mortgage making the total time to pay off 22 years! Not as short as I want but better than the traditional 30 year.

    1. Congrats on the refi! You know yourself best. 4 cities in 7 years means that there’s a HIGH chance you will not be in your property after 7 years. A lot of folks fool themselves into believing they will, hence they spend more money on 30-year fixed loans. But statistics show 7 years is the median time for ownership.

      I’m personally NEVER selling any property so long as commission rates are 5% or higher. It’s absurd in today’s internet age.


      1. Sam, if you were buying a new property this month, would you still go with an ARM given the interest rate increase (just a blip at this point) we’ve experienced since The Donald was elected?

        1. I would, since the 30 year fixed mortgage rate increased just as much, if not a little bit more as well. Five years is a long time to make some decisions, pay down some debt, saw your house, rent out the house, relocate etc.

  29. We are trying to stay pretty fluid at this point in time. We have a small $45,000 mortgage at 2.8% and a larger $300,000 loan that is held by the previous owner of our small apartment complex at 5%. We would have had to take out a commercial loan for that property so we were happy with that deal and almost no closing costs. We are looking to sell our house next summer – so we are deciding whether to pay down that $300,000 loan or keep the money fluid and see what happens over the next few years. We have 10 rental units – not sure we want to take on more, but hate to close that door (since we can’t qualify for mortgages easily now without “real” jobs!) Happy Thanksgiving!

    1. Happy Thanksgiving Vicki,

      If you sell your house next summer, where will you live and do you need the money to buy a new place?

      From a lender’s perspective, if I knew the person was going to pay me back, I’d happily lend at 5% all day long. Hence, perhaps chip away at it as I’m doing my 4.25% loan.


      1. We are planning on moving in to a rental I bought 23 years ago – its smaller and much less upkeep and has a beautiful unobstructed lake view. We don’t need our inground pool with the kids grown up and working now. We’ve had the same tenant in that rental for 22 years – so it will be time for her to move along! That is the property with the 2.875% mortgage and it will be about $41,000 by the time we move (payments of $410/mo without taxes/ins). The tenants paid it off twice since she lived there – but we took a mortgage on it to buy the apartment complex. I think we’ll split up the proceeds of our house sale and pay a big chunk on the $300K (maybe $100K) and keep some back for a few months to see how things go. Chipping away after that is likely what we’ll do.

        1. Ah, gotcha. Sounds like a good plan! However, it would be difficult to move your tenant out? I guess it depends on how old your tenant is. In San Francisco, if your tenant is above a certain age they have protected rights and cannot be moved.

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