You are double-counting inflation here. If your mortgage is 5.75% and is deductible in a 22% bracket, that is 4.48% after tax, and 1.48% above inflation if inflation is 3%. To beat that with an investment, you need to earn 4.48% nominal, not 1.48%. Alternatively, you need to earn 1.48% real.I calculate the REAL mortgage interest as
APR*.78 - Inflation
Where 0.78 = (1 - tax-bracket)
You have to beat that with your nominal investment return to the tune of
Appreciation%/0.78
One wrinkle here though: If you pay PMI or some equivalent, it might be worthwhile to get rid of it.
Either of these can be beaten with a low-risk bond investment in an IRA or 401(k), so you should max out those accounts in preference to extra mortgage payments. But you can't earn quite this much in a taxable account; Vanguard Long-Term Bond Index Admiral yields 5.34%.
But I agree that the more important benefit of a paydown is getting down to 80% LTV. Even if you don't pay PMI, this will allow you to refinance on the commercial market if that is a better deal.
It's close enough that it would be reasonable not to pay down the mortgage immediately, but to invest in a "mortgage payoff fund" in a bond fund. When you can get to 80% LTV by selling just that bond fund, you may consider paying it down and refinancing. Alternatively, if interest rates drop, you can sell the bond fund for a capital gain to sell bonds that are now yielding much less than your mortgage rate.
Statistics: Posted by grabiner — Mon Apr 29, 2024 11:30 pm