If you obtained a mortgage at any point from 2010 through early 2022, there is a good chance your mortgage rate is at or below 4.50%.
The wise person makes at least one extra full mortgage payment per year, to knock off years and interest off their mortgage. No question that’s a great way to save money and save time on your mortgage. This mechanism definitely can help you on your journey to financial freedom!
However, this blog post may be long overdue. You should STOP making EXTRA mortgage payments on your LOW interest rate mortgage, if you have not already!
mortgage rate trend – decade long highs
The chart below shows that mortgage rates were very low in 2012 through 2013. Mortgage rates showed a dip again in 2016 to 2017 and then, the pandemic occurred. The pandemic showed the lowest mortgage rates in history, as the 30 year mortgage rate was in the 2.50%-3.00% for almost 2 years!
What has changed? The Federal Reserve, in their fight against record inflation, have been raising rates almost each time they have had their FOMC meeting.
The fed, interest rates and inflation
The Fed started with a 25 basis point (or 0.25%) increase, then 50 basis points, followed by an onslaught of 75 basis point increases, juicing up the fed funds rate, the rate at which financial institutions borrow. This raises the borrowing cost across the country, as institutions and businesses need to raise rates and prices, in order to be… profitable.
Theoretically, this should then reduce the spending and should take money out of the economy and – in the moderate term – reduce inflation. What does this have to do with mortgage rates?
If you look at the mortgage rate chart above, from April 2022 through present day, the mortgage rates have spiked to a high of 7% even this year. Therefore, the value of your mortgage you took out during the pandemic or even in 2016-2017 is extremely valuable / powerful. Why is having a mortgage rate that low a good thing?
Financial institutions and Fin-tech companies, due to the rise of rates and money being sucked out of the accounts of deposits due to higher costs, has put a war on retaining and attracting YOUR money! What are they doing to attract your money? They are sky rocketing their savings interest rates, of course.
Here are a few places where you can earn AT LEAST 3%:
SoFi Savings – 3.00% – I personally use this account for both savings and investing. Quick plug – you can ear up to $275 bonus money for signing up!
Vio Money Market Savings – 3.52% – I’ve used them in the past. A simple, basic account, earning you the highest I have seen.
Capital One Savings – 3.00% – keeping up with SoFi and Ally. Ally isn’t showcased here, as they are 2.75%.
Wealthfront – 3.30% – Here is where the Fin-techs are shaking the game up.
Personal Capital – 3.35% (up to 3.45%) – Yes, even Personal Capital is getting deep with your money, offering a competitive 3.35% rate.
So now we have the details. Mortgage rates are significantly higher than where they have been the better part of 10+ years. In addition, the money you earn just sitting on it is higher than where they have been in the last 10+ years as well. I am not even going into the Treasury Bills / Treasury Bonds that are yielding 4%+, nor am I even going into the Series I bonds, which are yielding over 6.50%+.
Stop making extra mortgage payments on low interest rate mortgages
At this current moment, if you have a below 3% rate on your mortgage, you may want to stop making any additional payments for the time being. You could park the cash and currently earn north of 3% right now, risk-free.
I am sure this will spark a debate here. Obviously you may have debt payment goals, in order to pay off your mortgage early and be financially free, sooner. I am all about that, too.
However, if you are looking at where to place extra funds, the worst case scenario is you should be earning at least 3.00% + on idle cash. Pure and simple. I know I’ve been earning 3.00%, at a minimum, on idle cash. If I am not investing or paying any extra on my mortgage, I know the money is earning 3.00% right now (over at SoFi).
I understand that you may be forced to pay down your mortgage, in case you need to reduce your balance to be within Loan to Value requirements by your financial institution, as well. Sometimes there is no getting around that, as well as paying extra to get out of PMI situations as well.
Expectations and when to pay extra towards the mortgage
I would anticipate that rates will top out towards the end of quarter 1 of 2023 or into quarter 2 of 2023. Based on expectations on the federal reserve, it appears that could be the peak season for interest rates. Therefore, if you’re okay with hanging tight, earning a little spread (difference between the interest rates) and waiting until then – you’ll be just fine.
Again, if you haev a goal to keep making extra payments on your low interest rate mortgage, by all means – please do. However, there is a spread on your savings that you can have, due to higher online savings rates, as well as buying US Treasuries (3 month treasury is ~4.1%-4.3%).
Are you still making extra mortgage payments? Are you okay with pausing that process and resuming when interest rates come back down? Do you know of a higher online savings rate, than those listed above?
Let me know in the comments, I look forward to your feedback!