Wealth Tip – How to pay dimes instead of dollars on your mortgage

The answer is pretty simple. Stop making extra payments on long term fixed rate mortgages. If you have a 30 year fixed rate mortgage, chances are that your interest rate is well below 5%, and inflation today is running at 8%. Traditional wisdom has always been that we should pay a little extra principal on our mortgages so that we can pay them off faster. That wisdom holds true in an economic environment where your interest rate is lower than the rate of inflation. But that is not the case today.

If you have a fixed rate mortgage with an interest rate lower than inflation, you should make your minimum monthly payments. Think of it this way. When you pay extra, you are paying the last payments first because you are directly reducing the principal balance. If you instead let that principal balance stay out there for as long as possible, inflation will eat it away. After 25 years of 8% inflation, you will literally be paying your mortgage with dollars that are only worth about 10% of what a dollar is worth today. You will pay those last payments with dimes instead of dollars.

Banks are well aware of this. Current interest rates have not yet caught up with inflation, but they will. And an economic secret that nobody will tell you, is that interest rates have to be raised to a rate above inflation to cure inflation itself. That means you will likely be seeing variable rates above 8% within the next couple of years. If you bite on a low variable rate loan, you will surely pay the price in a few years. Once banks have the ability to loan money out at rates higher than you are paying on your fixed rate mortgage, they will start doing anything in their power to convince us to either refinance, pay early, or do anything they can to shorten the duration of your loan. You will start to see all kinds of articles talking about the amount of interest you can save by paying your loan off early. But it’s better to be patient.

And also, if you did succeed in buying a house with a long term fixed rate mortgage, be very happy! Think long and hard before moving or trading your house. You are in one of the very few positions that lets the little guy win over the big guys. Those who sit in a 30 year mortgage until it is paid off are some of the very few winners in the finance shell game that exists out there.

So enjoy the extra cash flow today, while dollars are worth more than they will ever be again. Let your mortgage sit out as long as possible, and those extra payments will be dimes instead of dollars.

Of course, you do have to make your normal payments. If you default, all bets are off.

Peace

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