Got a Fixed Rate Mortgage? Root for High Inflation.

With all the liquidity that the governments of the world have been releasing into the economy, I believe it will only be a matter of time before we begin to experience a nasty bout of inflation that will force interest rates into territory not seen since the late 1970s and early 1980s.

With that in mind it got me thinking, if high inflation is inevitable, is it still worth it for me to continue to pay down my mortgage with a goal of completely retiring it by the time my son, God willing, graduates from high school seven years from now?   For me, the answer to that depends on just how long I think the inflationary period will last.

So what’s my situation?   As I discussed in my previous post on the benefits of living within your means, I bought my current house in 1997 for $199,000.     Over the 10-plus years that I owned the house I have faithfully made extra principal payments in order to ensure that I was mortgage free by the time my first child was out of high school.   As a result, today, I owe less than $120,000.

After my latest refinancing goes through, my new mortgage bill will be reduced from $1122 to only $640.   This new monthly payment borders on a level approaching the ridiculously absurd!   By that I mean the new monthly mortgage is so low that I should be able to pay it with little trouble, regardless of what type of job I have.

Furthermore, the new lower monthly mortgage also has the advantage of putting a much smaller dent into my rainy day fund than my old mortgage.   Of course, although I will be going from a 20-year fixed loan back to a 30-year fixed loan, my original plan for now will be to stay the course and continue paying excess principal on the loan to ensure that it is retired early.

Or will it?

Because if inflation goes into or near double-digit territory, as I believe it will, I may be wiser to hold onto that money going toward the extra principal and forget about retiring the debt early.

Why?   Because as inflation rises, it erodes the value of the dollar over time. Banks, in particular, hate high inflation because folks with longer-term fixed-rate loans end up repaying those loans with dollars that are worth a lot less than the value of the dollars they originally borrowed.   Normally, interest payments are more than enough to compensate the banks for the costs attributed to benign inflation, but when high inflation appears, all bets are off — for the banks anyway!

High inflation is a blessing for those who find themselves deep in debt — assuming they still have the means to stay solvent.     And who is one of the biggest debtors among us?   None other than good old Uncle Sam!   Trillions of dollars of debt.   For this reason I believe that the Fed will ultimately determine that the best way to reduce the impact of the multi-trillion dollar debt run-up by the United States is to unleash a managed run of high inflation over a period of several years.

Sure they used to talk a good game about reigning in inflation, but I believe they now think that it’s their “best” and “only” option out of the debt mess this country currently finds itself in.

That’s why, as the household CEO, I’ve decided after a dozen years of doing otherwise, to officially reverse course and abandon my quest pay off the mortgage early.

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Comments

  1. 1

    JR says

    I have the same problem. I could pay off my 200k loan out of savings but, with inflation coming and maybe even hyper inflation, I not sure. If interest rates on treasuries rise and even higher on short term bonds. I may be better off waiting and taking advantage of the high interest rates?
    Let me know how your numbers work out. Thanks

  2. 2

    says

    JR: I decided to take the extra principal payment money (equivalent to one extra payment per month) and put it in a separate (relatively) high interest savings account for awhile. I will continue to collect and park that money there until I get more clarity on the inflation situation. If the Fed can somehow contain inflation by managing to remove the excess liquididty from the economy over the next several years (doubtful), then I’ll use that money to pay off the mortgage. If I see inflation rearing its ugly head, I’ll probably use the money to help buy inflation-resistant assets (like gold or real estate).

  3. 3

    says

    Been reading for a few days now. It was very good and solid information. BTW, I like your site design as well. I enjoyed reading it and hopefully you will write more soon. Do you have a newsletter? How do I subscribe to the blog itself?

  4. 4

    says

    As difficult as it is to say on a blog dedicated to frugality, the possibility of inflation of this magnitude actually makes it possible to argue for getting into all kinds of debt, but only for appreciating assets.

    Since the dollar will assumably continue to lose value as liquidity is injected, purchasing anything that will hold its value (houses, land, etc) with the constantly depreciating dollars seems like the most reasonable course of action.

    • 5

      says

      The drawback though is that there is a risk of betting on the come, so to speak – if your bet is wrong, your financial position will most certainly be in dire straights.

  5. 6

    says

    Hey Len,

    No long-term fixed-rate mortgages here. If you can lock for 5 years with a rate premium of ~2% and then end up having to pay whatever are the prevailing rates afterwards anyways, then variable starts to look a lot more attractive.

    Then again Canada’s finances are in better shape so less risk of high inflation here, but it can’t be ruled out cause we’re still highly tied to whatever happens down south!

  6. 7

    Anony mouse says

    Well here’s the thing. A house is an asset and tangable. If you pay that off you have something physical you can sell. A retirement account while it is a monetary value is actually just a “possibility.” If the dollar collapses, your house will still be there and you will have whatever equity you have built up still in it, the faster you pay it off the better, but your retirement account won’t be worth squat.

    • 8

      Len Penzo says

      You make a great point! Although if the dollar collapses, you should in theory also be able to pay your home loan off almost immediately with what are essentially worthless dollars — regardless of how much you owed.

  7. 9

    Leasi says

    We are few years to retirement and working now to finish to,pay our house that is our only debt. I think that if we, my husband and I, were younger we could hold this quest. We plan, however, quit the house this year and then, withou debt, save every penny to have more cash into our rainy day account. We still have some years before retirement to do that. What do you think?

    • 10

      Len Penzo says

      I don’t quite follow you, Leasi. Are you saying you are going to stop paying extra principal on your mortgage and use that money to build a rainy day account first?

      At the most general level, I would have a rainy day fund established before I ever paid any extra principal on the mortgage.

      Of course, there are so many variables that I would need to know, before I could make a suggestion.

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