2703: Why Paying Off the Mortgage Early May Be a Big Mistake by Len Penzo on How to Fight Inflation

[00:00:00] This is Optimal Finance Daily, Episode 2703.

[00:00:04] Why Paying Off The Mortgage Early May Be A Mistake

[00:00:08] by Len Penzo of LenPenzo.com

[00:00:11] and I'm your host and personal finance enthusiast, Diania Merriam.

[00:00:15] We're going to get right to it as we optimize your life.

[00:00:22] Why Paying Off The Mortgage Early May Be A Big Mistake

[00:00:26] by Len Penzo of LenPenzo.com

[00:00:30] Should You Pay Off The Mortgage Early?

[00:00:33] That question is, without any doubt, the most popular question posed by my readers.

[00:00:38] And sure enough, the other day I received this note from Lauren

[00:00:41] regarding the wisdom of paying down the mortgage early.

[00:00:44] Quote,

[00:00:46] Len, we've been working to pay off our mortgage ASAP

[00:00:49] but inflation has us wondering if we should continue to do that.

[00:00:53] Do you think it's better to divert some of our extra mortgage payments

[00:00:57] to buy precious metals?

[00:00:59] There's always a passionate debate

[00:01:02] between those who believe paying off the mortgage early is a no-brainer

[00:01:06] and folks like me who think it's better to put your money elsewhere.

[00:01:10] Ultimately, you'll need to make your own decision

[00:01:13] but here's why I'm not paying off my mortgage early.

[00:01:16] For many years I was a huge proponent of early mortgage retirement.

[00:01:20] So much so that between 1997 and 2009

[00:01:24] I made approximately $80,000 in additional mortgage principal payments to my lender.

[00:01:29] But during the spring of 2009

[00:01:32] it became apparent to me that the Federal Reserve was no longer committed

[00:01:35] to protecting the value of the US dollar.

[00:01:38] So I began to waver on the wisdom of the early mortgage payoff philosophy.

[00:01:43] Soon after, I became absolutely convinced

[00:01:46] that paying off my mortgage was no longer in my best interest.

[00:01:50] Because the risk of high inflation, if not an outright US dollar collapse

[00:01:54] had become extremely likely

[00:01:56] and loan values are essentially inflated away

[00:01:59] in the presence of a collapsing currency.

[00:02:02] Inflation and the fixed rate mortgage

[00:02:06] In his book, When Money Dies

[00:02:09] Adam Furgensen chronicles life in Germany

[00:02:12] in the collapse of the mark between 1919 and 1923.

[00:02:17] Germany's currency declined so quickly relative to gold and silver

[00:02:21] as the inflation rate increased, slowly at first but then very rapidly.

[00:02:27] As inflation surged, rent control became widespread in Germany.

[00:02:31] In case you're wondering,

[00:02:33] rent control is very common during hyperinflation events

[00:02:36] because it helps reduce the risk of civil unrest.

[00:02:39] As for those who had a mortgage, Furgensen writes,

[00:02:43] Mortgage payments became no more than a nominal burden to homeowners

[00:02:48] a consideration which dismayed the mortgage banks.

[00:02:52] This was for good reason.

[00:02:54] Fixed rate mortgage holders were quickly learning

[00:02:57] that hyperinflation was truly a debtor's best friend.

[00:03:01] As Furgensen notes,

[00:03:03] one woman went to stay in the country and asked her host bluntly

[00:03:07] what they were doing with all the money they were squeezing out of the townspeople.

[00:03:11] They replied candidly that they were paying off their mortgages.

[00:03:15] By September 1922, inflation was completely out of control

[00:03:20] thoroughly decimating the purchasing power of the collapsing mark.

[00:03:24] So much so that Germans with fixed rate mortgages

[00:03:27] were paying off their home loans with a week's wages.

[00:03:31] Financially savvy Germans who were able to secure loans

[00:03:34] during the hyperinflation were even more fortunate

[00:03:37] as Furgensen explains here,

[00:03:39] quote,

[00:03:40] In February 1922 with a loan from a friendly banker,

[00:03:44] a farmer bought an estate neighboring his own property

[00:03:47] for approximately $371,000 in 2023.

[00:03:53] He paid the debt in the autumn

[00:03:55] with the sale of less than half of the crop of one of his potato fields,

[00:03:59] end quote.

[00:04:00] Of course, this was possible because as the mark became less valuable over time,

[00:04:05] the portion of currency that household allocated to shelter, food,

[00:04:09] heating and electricity shifted.

[00:04:12] Before debasement of the mark began in 1913,

[00:04:16] household expenditures for shelter and food were essentially equal.

[00:04:20] However, as inflation got worse,

[00:04:23] the amount of household income required to keep a roof over one's head

[00:04:27] became trivial.

[00:04:28] By 1923, renters and fixed rate mortgage holders

[00:04:32] were putting just 0.2% of their income towards shelter.

[00:04:37] In order to benefit from paying off your mortgage in such a scenario,

[00:04:40] wages must keep pace with inflation.

[00:04:44] The good news is history shows that wages do keep pace with inflation,

[00:04:48] albeit with a slight lag.

[00:04:50] That's because they have to.

[00:04:52] Otherwise there would be no incentive to work.

[00:04:55] What if scenarios?

[00:04:57] I know what you're thinking.

[00:04:59] Could the government bail out the banks by passing a law that revalues my mortgage?

[00:05:03] Perhaps.

[00:05:04] In fact, Germany revalued mortgages shortly after that infamous

[00:05:08] Weimar hyperinflation in the 1920s.

[00:05:11] I even wrote an article explaining how a similar mortgage revaluation law

[00:05:16] would work in the U.S.

[00:05:17] However, I don't think that's likely, at least not in the United States.

[00:05:21] After all, a mortgage is a contract,

[00:05:24] and I believe that contract law will remain.

[00:05:27] And what if you're wrong, Len?

[00:05:29] What if you're just being a big worry wart

[00:05:31] and it turns out that the dollar doesn't ever collapse?

[00:05:34] Well, I still have no regrets.

[00:05:36] Here's why.

[00:05:37] Generally speaking, annual mortgage expenditures

[00:05:40] become sharply reduced over time for those with fixed rate mortgages.

[00:05:44] Of course, the trick is in staying gainfully employed.

[00:05:48] The proportion of my paycheck spent on the mortgage steadily dropped.

[00:05:52] Actually, it plummeted from 38% in 1997 to just 3% last year.

[00:05:58] And keep in mind that's without hyperinflation.

[00:06:02] Eventually, my mortgage payment was such a small percentage of my total income

[00:06:06] that it became an afterthought.

[00:06:08] And that gave me flexibility to allocate more income through the years

[00:06:12] for investing and buying precious metals to protect my wealth.

[00:06:15] Of course, that 3% figure was made possible

[00:06:18] via a series of cashless refinances.

[00:06:21] But even if I had kept my original mortgage,

[00:06:24] the proportion of my income devoted to my home loan

[00:06:27] would still have been just 7% of my income last year.

[00:06:31] So patience earns its reward either way.

[00:06:34] The bottom line.

[00:06:36] Don't get me wrong, there's still a lot to be said

[00:06:39] about the advantages of paying off the mortgage early.

[00:06:42] In a normal world with low inflation, modest interest rates,

[00:06:45] and a healthy financial system that rewards savers and punishes debtors,

[00:06:49] it's certainly the path I would take.

[00:06:52] Unfortunately, I don't believe that's the environment we live in anymore.

[00:06:59] You just listened to the post titled

[00:07:01] Why Paying off the Mortgage Early May Be a Big Mistake

[00:07:04] by Len Penzo of LenPenzo.com

[00:07:07] and I'll be right back with my commentary.

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[00:09:01] While I've heard that a mortgage is a good hedge against inflation,

[00:09:05] that hasn't been the main driver as to why I've decided not to pay mine off early.

[00:09:10] There are certainly emotional benefits to having a paid-off house,

[00:09:14] but they don't appeal to me for a few reasons.

[00:09:17] First of all, you're always going to have housing costs.

[00:09:20] Even if your mortgage is paid off,

[00:09:22] you'll pay property taxes forever and they will continue to go up.

[00:09:25] You'll also always have maintenance costs.

[00:09:28] Whether you rent or you own,

[00:09:30] whether you have a mortgage or not,

[00:09:32] you'll always pay something to live somewhere unless you're house hacking,

[00:09:36] which means you rent out portions of your primary residence

[00:09:39] and have your tenants pay your costs.

[00:09:41] I see my primary residence as a lifestyle decision,

[00:09:44] not an investment,

[00:09:45] and I want to put the bulk of my money in income-producing investments,

[00:09:49] not an asset that needs ongoing cash infusions.

[00:09:53] My stock portfolio doesn't have any requirements for additional contributions.

[00:09:58] Whether I put more money into it or not,

[00:10:01] it'll continue to grow.

[00:10:03] It's an income-producing asset.

[00:10:05] My primary residence has the opportunity to appreciate value,

[00:10:09] but over the long term, statistics show that this appreciation

[00:10:12] typically only keeps up with inflation.

[00:10:15] So why would I want to lock up my money in this tangible asset

[00:10:19] when it could be working harder for me elsewhere?

[00:10:22] Also, my mortgage is $600 per month.

[00:10:25] It's a very reasonable cost that I can easily meet

[00:10:27] even with a loss of income or other financial hardship.

[00:10:30] If I had a mortgage that was a higher percentage of my monthly income,

[00:10:34] for many it's close to 30% or more,

[00:10:36] I would probably get more of an emotional benefit from paying off my mortgage.

[00:10:41] And that'll do it for today

[00:10:43] and another installment of Optimal Finance Daily.

[00:10:45] Have a happy Thursday.

[00:10:47] Thank you for being here every day and listening,

[00:10:49] and I'll see you tomorrow as usual

[00:10:51] where Optimal Life awaits.