That isn't how I would do it. I am suggesting you keep the mortgage, and reinvest in relatively short term securities, which are yielding almost as much as the mortgage rate. Typically this would cost you because long term rates are greater than short term rates, and mortgage rates tend to be higher than risk free long bonds because mortgages have a payoff option, which means the lender needs to get a higher rate to compensate for that.grabiner wrote: ↑Sat Jul 21, 2018 2:18 pmHowever, you should not look at the mortgage in isolation. Having a fixed-rate mortgage means that you will benefit from unexpected inflation. Conversely, having fixed-rate bonds means that you will be hurt by unexpected inflation, as you will be paid back with deflated dollars. Having both bonds and a mortgage, with the same duration, cancels out the inflation effect, so you come out ahead if the bond rate exceeds the mortgage whether inflation is high or low.JBTX wrote: ↑Sat Jul 21, 2018 12:18 amHaving a low rate mortgage is kind of an inflation hedge. If inflation and interest rates go up, you get to pay off your mortgage in deflated dollars. I can recall my parents having mortgage in late 70s / early 80s that was substantially below market rates. The banks were always trying to get them to pay it off. As good of a deal as they had, the mortgage rates they had were at least twice as high as 2.6%.
Another conclusion you should draw here is that TIPS become less attractive if you have a large fixed-rate mortgage. TIPS protect you against inflation risk, but you have a large expense which is not affected by inflation.
But now you have money in TIPS, CD's, money markets, short term treasuries, maybe some municipals, plus the mortgage at an unusually low rate. This is for the most part breaking even now, maybe a small drag due to taxes. If interest rates drop, and you expect them to stay there, simply liquidate the holding and payoff the mortgage. Little is lost. If interest rates go up, you can keep the mortgage, and keep the money in higher short term rates, or perhaps reinvest them in higher long term rates - at that point your example becomes true, but you have locked in to a positive interest rate spread during the life of those securities.
You could argue that the likelihood of rates going up enough to make that spread worthwhile is small. That could be true, if things behave like the last 30 years. But if inflation rears its head in a big way, you could end up having a nice cash flow going forward.
There aren't many good inflation hedges out there. Having a long term low interest mortgage is one of them.
Kitces frames it a bit differently, but the result is the same
https://www.kitces.com/blog/why-a-mortg ... -that-are/