I realize we’re feeling a financial squeeze like never before, and you may laugh at the thought of having extra money laying around at all. But with inflation being at the highest level in 4 decades, I’d love to drive the point home for good. There was never a better time to understand why overpaying a mortgage at low interest rates comes at significant opportunity cost, and benefits the bankers at your expense.
In one year, the value of our money supply – your cash – decreased by more than 7.5%. Now, we all hope that the annual inflation rate won’t be 7.5% over the next 30 years, but whatever it is, could you see your money losing half its value in that time period? All that it would require is a 2.4% annual interest rate. Sure, it could happen. In fact, it almost certainly will.
Could you have some fun with me with this example? Let’s say 30 years ago you bought a house with a $2000 monthly payment. Can you imagine how nice of a house that would have been in 1992? If you had paid your 30-year mortgage on schedule, you’d be in your 30th year of making payments, and you’d be paying the same amount in combined principal & interest that you started paying in 1992: $2000. But today’s $2000 isn’t worth nearly what it was in 1992. Back then, $2000 could buy you $4007 worth of today’s goods and services. See for yourself (plug in 1992 and $2000)!
Think about that. If you saved an extra $2000 back in 1993, and you put it in an account that simply kept up with inflation, you’d have $4007 today – two mortgage payments. Read all the way to the end to hear the amazing amount this house would be worth today.
If instead, you had put that extra $2000 into your mortgage, you would have saved literally a few dollars in interest, but you also would have handed the bankers $2000 that they were able to leverage and grow over 30 years, enriching themselves. Oh, and since big banks actually over-leverage and take ridiculous risks with money, they nearly brought down the financial system multiple times, and you, a member of the taxpaying public, picked up the cost to bail them out!
Interestingly, if you use the rule of 72, it turns out the average annual inflation rate over the last 30 years was 2.4% Thus, if the next 30 years are like the last 30, you can expect your $2000 today to buy $1000 worth of goods & services in 2052. With that understanding of inflation, does it still make sense to overpay your mortgage? Why give up $2000 today when you can wait 30 years to make that payment, when it has half as much value as today?
I glossed over a very dubious assumption. All this assumes a 2.4% future inflation rate. 2021 experienced 3 times that rate! With $30 trillion in debt, entitlements raging out of control, the money supply predicted to grow more than 60% in the next 4 years (see US M2 money supply now and in 4 years), what interest rates can you expect? What if it turns out to be 5%, in which case your $2000 will be worth $1000 in 14.4 years, and less than $500 in 29 years?
Since this newsletter is growing long, I’ll quickly address the “but my house is appreciating” argument. Though appreciation isn’t guaranteed, it’s completely irrelevant. Accelerating your mortgage payments creates not 1 cent of wealth, only the market does.
“OK, I get it. Overpaying my mortgage isn’t the best idea. But what else can I do?”
Good question. If you have extra cash flow, you sure don’t want to risk losing it. That’s no better than losing value to inflation. Making money grow safely, efficiently, and tax-advantaged is where we specialize. This may be in a future newsletter, but if you’d like to know sooner, just holler!
By the way, a $2000 payment on a house in 1992, at 4% and a 30-year term, would have purchased a $418,500 home, which would be an inflation-adjusted $839,500 now, assuming NO market appreciation. With 3% market appreciation, it would be almost $3.2 million!
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Thank you for your time and for taking control of your financial future!
Sincerely,
Sam Arieff
Arieff Consulting
(904) 478-0102
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Disclaimer: This newsletter represents the opinion of Arieff Consulting, Inc, and does not constitute financial, tax, or legal advice.