1

I don't see an exact match to this question although I previously asked when things were calmer. The press is quoting a real YoY inflation rate of 7%. Let's assume there is a mortgage at 4% and a interest-generating bank account at .1%.

  1. Leaving the money in the bank seems a terrible idea.
  2. Paying off the mortgage early takes the assumption that the real-estate backed by the loan does not appreciate at the rate of inflation. Liquidity is also locked up but less of a tax penalty in the event of a heloc?
  3. TIPs and CDs rates arent' matching real-inflation
  4. Passive Stock Market investing short term carries possibility of hitting the end of market cycle - and Tax Events for withdrawal in near term

As such, paying off the mortgage debt early remains the best option versus leaving money in the bank. Does that sound right?

Sources:

  1. https://www.pbs.org/newshour/economy/inflation-jumps-7-percent-the-biggest-increase-since-1982-as-americans-increase-spending

  2. Is inflation inapplicable in a comparison of paying off debt vs investing?

  3. USA, NY State Homeowner Post-TCA: Should I pay off mortgage or attempt to find investments?

4
  • 3
    Just a small note - consider reframing what you are calling 'risk'. You say that paying down the mortgage carries 'risk' that the home value does not appreciate', but realistically your home's value is unchanged by how much mortgage you pay off. Paying down the mortgage will reduce your risk because you will have higher certainty in returns [the home will go up/down in value by the same amount regardless]. You could be missing out on different returns compared to, say, investing in the stock market, but that is not the same thing as experiencing the 'risk' of variance in returns yourself. Commented Jan 17, 2022 at 16:34
  • Noted and Agreed - Post has been updated to reframe.
    – NJL
    Commented Jan 17, 2022 at 16:38
  • This also depends on how much money in the bank you are talking about. Assuming it's not your emergency fund and it is equally available for investing or paying down your mortgage, you may have different preferences for $5000 vs $50000.
    – chepner
    Commented Jan 17, 2022 at 17:42
  • 2
    "TIPs ... aren't matching real-inflation" TIPS match inflation by definition. Can you explain more what you mean by this?
    – D Stanley
    Commented Jan 17, 2022 at 21:20

1 Answer 1

1

Yes, paying off the mortgage is a better idea that leaving the money in the bank regardless of inflation. Even if there were no inflation, you'd be earning a 4% "return" by saving on interest in future payments, putting more toward the principal and increasing you're equity.

The drawbacks are that the equity in your house is much less liquid that cash in the bank, so be sure you keep enough liquid cash to deal with emergencies so you don't have to borrow money to cover emergencies and pay that interest back.

2
  • It's a better idea NOW. But if inflation stays high, eventually interest rates will catch up and could easily exceed 4%. Then you missed the boat.
    – Hilmar
    Commented Jan 18, 2022 at 1:52
  • If inflation stays high then money in the bank will lose more value too - the question was comparing a savings account to paying a loan. Between those two, paying a loan wins except for loss of liquidity.
    – D Stanley
    Commented Jan 18, 2022 at 2:25

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .