Before Paying Off Your Mortgage - Read This
Paying off your mortgage makes sense for a lot of people. In a saner time (maybe sometime before 1980 or so?), Americans aspired to pay their mortgages off. In fact, there was a custom where people who paid off their mortgages would hold a "mortgage burning" party. (You can read a brief story about it here.)
Needless to say, you don't find many people holding mortgage burning parties anymore. But that doesn't mean that people don't pay off their mortgages, or that it might make sense to do it. You can read a reasonable analysis of whether you should pay off your mortgage here. It's not a bad article. The numbers crunching mostly works. Briefly, if you can't find an investment that pays more than the interest you're paying on your mortgage, paying it off will be a better use of your money. But as some of you who read this blog probably realize, numbers don't tell the whole story a lot of the time. So let's put on our thinking caps.
One thing the article doesn't take into account: inflation, specifically high inflation. I'm mentioning high inflation for a couple of reasons. First, while we've been in a low inflation environment - at least when it comes to a lot of items - there are necessities like food where prices seem to be going up now. And if that continues, we're going to be looking at higher inflation. In fact, if you check this recent post, you'll see we might even be looking at hyperinflation.
So let's look at what happens if you paid off your mortgage and we have high inflation or, worse, hyperinflation.
You probably wind up with a house that increases in value, which is, of course, not such a bad thing. People expect that the prices of all kinds of real estate will go up if we get serious inflation. They think this because, in general, tangible assets (houses, gold, diamonds, even art work and various collectibles) do well when there's inflation. Same holds for commodities (which are tangible assets) like oil, agricultural products like corn and wheat, etc. - basically anything you can touch, taste, smell vs. paper stuff like bonds, stocks, and dollars.
Anyway, that's the theory and it makes sense. So you should pay your mortgage off, right? Maybe.
Before you do, think some more. If by paying your mortgage off you don't have any other assets left, and we get high inflation, how are you going to pay for stuff you need? In the article that recommends paying off the mortgage, the couple in question was going to use all their money that wasn't tied up in an IRA to pay the mortgage off. The couple is retired, so they're not making any income except what they make from their investments.
If their IRA is large enough, maybe they can live off that. But wait. What if their IRA - like most IRA's out there - is invested in stocks, bonds and cash? And what if the value of stocks, bonds and cash goes down while we're having high inflation? Then what? How are they going to pay for things they need? They don't have any outside income. Remember, they're retired.
And, in fact, the value of their "intangible" assets - i.e., their stocks, bonds and cash - will most likely go down if inflation really takes off. And if we have hyperinflation, the value of intangible assets could very well go down - I hate to say it - to zero!
Now, if they hadn't paid off the mortgage, they'd at least have more money - the money they didn't use to pay off the mortgage. Then again, if inflation's bad enough and goes up quickly, that won't last forever either. So what to do?
I know what I might do. I might take my cash and buy some gold and precious metals before I paid off the mortgage. At least that's what I'd think about doing right now. At least I'd have something besides my house that would retain its value if inflation fires up (or worse, hyperinflation).
As for my mortgage, inflation makes the value of a mortgage go down. The mortgage is measured in dollars, right? So as the dollars depreciate in value (go down), the mortgage is worth less. So I didn't pay off the mortgage, but I'm kind of letting inflation do that for me, in a sense. Meanwhile, I've got my house going up in value and something else on the side going up in value - my gold. And at least, if I need to, I can use the gold to get things I need. I really can't "spend" my house.
Anyway, it's just some food for thought if you're thinking of paying of your mortgage.
Needless to say, you don't find many people holding mortgage burning parties anymore. But that doesn't mean that people don't pay off their mortgages, or that it might make sense to do it. You can read a reasonable analysis of whether you should pay off your mortgage here. It's not a bad article. The numbers crunching mostly works. Briefly, if you can't find an investment that pays more than the interest you're paying on your mortgage, paying it off will be a better use of your money. But as some of you who read this blog probably realize, numbers don't tell the whole story a lot of the time. So let's put on our thinking caps.
One thing the article doesn't take into account: inflation, specifically high inflation. I'm mentioning high inflation for a couple of reasons. First, while we've been in a low inflation environment - at least when it comes to a lot of items - there are necessities like food where prices seem to be going up now. And if that continues, we're going to be looking at higher inflation. In fact, if you check this recent post, you'll see we might even be looking at hyperinflation.
So let's look at what happens if you paid off your mortgage and we have high inflation or, worse, hyperinflation.
You probably wind up with a house that increases in value, which is, of course, not such a bad thing. People expect that the prices of all kinds of real estate will go up if we get serious inflation. They think this because, in general, tangible assets (houses, gold, diamonds, even art work and various collectibles) do well when there's inflation. Same holds for commodities (which are tangible assets) like oil, agricultural products like corn and wheat, etc. - basically anything you can touch, taste, smell vs. paper stuff like bonds, stocks, and dollars.
Anyway, that's the theory and it makes sense. So you should pay your mortgage off, right? Maybe.
Before you do, think some more. If by paying your mortgage off you don't have any other assets left, and we get high inflation, how are you going to pay for stuff you need? In the article that recommends paying off the mortgage, the couple in question was going to use all their money that wasn't tied up in an IRA to pay the mortgage off. The couple is retired, so they're not making any income except what they make from their investments.
If their IRA is large enough, maybe they can live off that. But wait. What if their IRA - like most IRA's out there - is invested in stocks, bonds and cash? And what if the value of stocks, bonds and cash goes down while we're having high inflation? Then what? How are they going to pay for things they need? They don't have any outside income. Remember, they're retired.
And, in fact, the value of their "intangible" assets - i.e., their stocks, bonds and cash - will most likely go down if inflation really takes off. And if we have hyperinflation, the value of intangible assets could very well go down - I hate to say it - to zero!
Now, if they hadn't paid off the mortgage, they'd at least have more money - the money they didn't use to pay off the mortgage. Then again, if inflation's bad enough and goes up quickly, that won't last forever either. So what to do?
I know what I might do. I might take my cash and buy some gold and precious metals before I paid off the mortgage. At least that's what I'd think about doing right now. At least I'd have something besides my house that would retain its value if inflation fires up (or worse, hyperinflation).
As for my mortgage, inflation makes the value of a mortgage go down. The mortgage is measured in dollars, right? So as the dollars depreciate in value (go down), the mortgage is worth less. So I didn't pay off the mortgage, but I'm kind of letting inflation do that for me, in a sense. Meanwhile, I've got my house going up in value and something else on the side going up in value - my gold. And at least, if I need to, I can use the gold to get things I need. I really can't "spend" my house.
Anyway, it's just some food for thought if you're thinking of paying of your mortgage.
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