{"id":476,"date":"2009-01-08T20:48:54","date_gmt":"2009-01-09T04:48:54","guid":{"rendered":"https:\/\/lenpenzo.com\/blog\/?p=476"},"modified":"2014-04-18T18:23:02","modified_gmt":"2014-04-19T01:23:02","slug":"low-interest-rates-will-not-last-forever","status":"publish","type":"post","link":"https:\/\/lenpenzo.com\/blog\/id476-low-interest-rates-will-not-last-forever.html","title":{"rendered":"Got a Fixed Rate Mortgage? Root for High Inflation."},"content":{"rendered":"

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.<\/p>\n

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.<\/p>\n

So what’s my situation? ? As I discussed in my previous post on the benefits of living within your means<\/a>, 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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

Or will it?<\/p>\n

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.<\/p>\n

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!<\/p>\n

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.<\/p>\n

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.<\/p>\n

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

If you liked this article, please be sure to subscribe to my RSS feed<\/a>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

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. 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