When I retired in March of 2008, I still had a small remaining balance on my mortgage. I thought about paying it off right when I retired, but decided to wait until later that year when the five years was up on the fixed period of our 4.75% rate. I figured that was pretty cheap money so I would hang on to it until the rate made it more expensive. The S&P 500 Index was around 1,300 at that time.
By the time the mortgage did adjust later that year, the S&P had dropped over 30%. And instead of adjusting upward, the rate on my mortgage went down to 3.5%. Instead of paying it off, I put that money in a 1-year CD earning 4.75%. I figured I’d buy another year and decide what to do next year.
That year I watched as the S&P dropped to its low of 676 by March of 2009. By the time our mortgage adjusted again, the S&P had worked its way up over 10% from the year before, and my mortgage rate was adjusted downward again to 3.25%. At that point, there was no possibility of finding CD that paid more than that, but I wasn’t eager to part with a big chunk of cash in case the market stayed low for several more years. I didn’t want to risk having to liquidate mutual funds if the market remained in the doldrums for the foreseeable future. So I punted another year.
Good call leaving everything alone, by the time the mortgage adjusted again last year, the market was up another 15%. The mortgage adjusted downward again to 3 percent which is where it sits right now.
When you are making the decision whether to deploy funds to pay off a remaining mortgage balance, you’ve got to consider the alternatives for that money. In the case of a CD earning a higher interest rate than the mortgage rate, that’s a pretty easy decision. In the case of putting that money in the market rather than in the mortgage, that can be a risky bet, but a consideration nonetheless. Liquidity needs will also play a role in that decision.
I have no crystal ball into the future, but if you are among those that believe inflation is going to be a big problem in the future, you may want to hedge your mortgage with Treasury Inflation Protected Securities. Details on how to do that are in my post at U.S. News & World Report, Why I Didn’t Pay Off My Mortgage Before Retirement.
This is a post from Retirement: A Full-Time Job.