Interest rates are hovering around 5%, which is a 37 year low. If they drop much more we will be at levels not seen in 50 years or more. This will be an interesting scenario. One that will definitely have to be evaluated.
So, let's think about it. Inflation over the years has averaged about 3.42%. Stocks have averaged about 8%. Five year CD rates have averaged about 4%. US Treasuries have averaged about 5.5% for 20 year notes. Now let's imagine that mortgage rates drop to 4.5%. You can now borrow money for your house that is only about 1% more than the historical inflation rate. In the future years you will paying your mortgage with dollars that are worth less than you paid to borrow them. Or to look at it another way, you could take out $100,000 in equity on your house and put that money in a 20 year US Treasure (in a few years assuming rates return to more normal levels) and pay your mortgage while you earn an additional 1%. Or you could put it in the stock market and you should be able to earn the average 8% over the next 20 years to pay your mortgage and earn 3.5% every year. None of this takes into account the deduction you will receive on your taxes which will lower the effective rate to at least 4% depending on your tax bracket. This could give us an opportunity to acquire capital at rates not seen for quite some time.
Now with this all said, I'm only a few years away from paying off my mortgage and my current plan is to just pay it off. But these historical rates make you think.
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