Many years ago, I wrote a small e-book titled “Should You Pay Down Your Mortgage?”  I lay out the arguments for and against paying down additional principal on your home mortgage.

I still consider most of it relevant today.  One thing that has changed is the tax laws.  There are far fewer people today who will itemize deductions on their tax return and get a benefit of deducting the interest portion of mortgage payments.  Anyway, I always thought this was a bad argument for not paying down a mortgage faster, and it was a really bad argument for taking on a bigger mortgage.

I am somewhat in the Dave Ramsey camp when it comes to a home mortgage.  I think it is generally better to pay it down and eventually pay it off.  You don’t get rich by paying interest to a bank or financial institution.  You get rich by collecting interest.

We are now in a situation where price inflation is higher than most people’s mortgage interest rate.  We are told that it doesn’t make financial sense to pay down a fixed-rate mortgage in an inflationary environment.

I don’t fully accept this argument.  You are still paying interest.  It doesn’t seem to make sense paying down a mortgage with a 4% interest rate when price inflation exceeds 8% annually.

But the question isn’t whether price inflation is higher than your interest rate.  The question is whether you can get a better return on your money than the 4% interest rate.

In a high inflationary environment, nominal interest rates tend to go higher.  In our world today, we have highly negative real interest rates.  You might be able to get 2 or 3% nominally buying Treasury bills or bonds.  If you could get, let’s say, a 7% return investing in a U.S. Treasury bill, then it would make sense taking the extra money you have and putting it there rather than putting it towards paying down the principal on your mortgage.

Don’t forget you will owe taxes on your “gains” on that 7%.  I put “gains” in quotes because it is still below the price inflation rate.

There are many legitimate reasons for not paying extra on your mortgage.  One obvious reason is that you simply can’t afford to do it.  It is also relevant how much liquidity you have.  If most of your net worth is tied up in your house equity and in retirement accounts, and you don’t have much money in the bank, then it is better to save up for a good emergency fund before tying it up in a mortgage.  The exception might be if you are close to paying off your home mortgage and can eliminate that expense from your life.

I have laid out those reasons before, but I just want to address an argument that may be unique to our time.  I am in this situation.

I refinanced at a perfect time.  It was in late 2020/ early 2021.  I have a 2% fixed rate on a 15-year loan.  2% is just ridiculously low, and it was at or near the bottom of mortgage rates.

I have not made any extra payments, and I really don’t plan to make any extra payments.  The rate is so ridiculously low.  Even though I am paying out a very small amount of interest, it seems that any extra money could be put to better use.  I really probably can get a better return elsewhere, though I understand that there are no guarantees in life.

Even with the incredibly low yields, I can still do very slightly better right there now.

Also, in this time of higher inflation, my mortgage payment is my one predictable expense each month.  It doesn’t change.  The property taxes may change, but the actual principal and interest don’t change.  Sure, I would rather not have it at all, but it doesn’t make sense to dump anything extra towards it at this time.

This is why personal finance is so personal.  If I had a rate of 4% or higher, I might be more apt to throw a few extra bucks at the thing each month.

I won’t say that I’ll never pay extra.  Times may change.  Maybe we’ll go into some kind of a deflationary depression where rates go to zero or near zero.

Or maybe in 10 years or so I will have so little left on the mortgage that it might make sense to write a check (metaphorically speaking) to get rid of the thing.

But if you have a 2% rate or something similarly low on your mortgage that is fixed, it probably doesn’t make sense paying it down unless you just have a lot of money sitting in the bank doing nothing.