“Get yourself some debt” isn’t the advice you’d expect to hear from your financial advisor. But with interest rates at record lows it makes sense to continue carrying debt in the form of a refinanced 15-year mortgage on your primary residence or vacation home. One of the key advantages of debt is its defensive qualities against inflation. A dollar today locked in at these low rates goes at least as far tomorrow and could go much further in the not too distant future.
I realize paying off a mortgage today with rates of return on treasury bonds so low can make sense, especially if you’re on a fixed income. But the cash you put into your home today could be a missed opportunity of investing in short-term bonds five or ten years from now that will pay a much more desirable real rate of return. With government borrowing expected to continue at such high levels, low yields aren’t something our country’s creditors will put up with forever.
Locking in a 15-year mortgage eliminates a significant chunk of interest you’ll owe your creditor compared to a 30-year mortgage. Chances are that rates on a 15-year mortgage haven’t been this low in your lifetime. If you were lucky to get in at the low of the 50s, you probably didn’t get a cash-back-at-closing 5-year ARM. Back then homes were purchased with a solid down payment and were paid off within 20 years. That was a different time.
What hasn’t changed is the fact that giving advice isn’t always well received. You know how “fun” it can be to give advice to your children, especially when it comes to investing, right? If they haven’t looked into refinancing into a 15-year mortgage, they need to. It could be the best investment advice you ever give them. If you owe a significant amount on your primary or vacation home, follow your own advice and do the same. If you pay off your mortgage in full, economically you’re making the assumption that rates will stay this low forever. Trust me, they won’t. One benefit of carrying some mortgage debt is that your dollar will go just as far five to ten years from now as it goes today. Meanwhile, prices on most things will have gone up. That’s why carrying debt on your home is a defense against inflation. And by saving some of your cash, you’ll be in good shape for a brighter day when real rates of return are higher.