You and Your 3% Mortgage

If you bought a house or refinanced your mortgage in the decade leading up to the spring of 2022, you have a right to feel lucky. Mortgage rates were often below 4 percent in those years, reaching an all-time low of 2.65 percent in January 2021. Then came inflation. As of early February, the average 30-year fixed mortgage rate had risen to 6.63 percent. 

“In the world of mortgages, that’s a gigantic difference,” says Jacob Channel, the senior economist at LendingTree. Getting a rate that is nearly twice as big “could increase your monthly payments by thousands of dollars.”

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With a low fixed-rate mortgage, you can, of course, sit tight and just keep making payments. But the rise in overall interest rates, which affect savers as well as borrowers, might make you ponder whether you should adjust your money or home plans. Here are some answers.​

Prepay the mortgage 

The inflation-linked trend of stronger investment yields and higher wages may have you thinking that you can now afford either to pay off your mortgage or accelerate your payments. But these probably aren’t wise choices. Better to invest that extra money instead, locking in returns at levels higher than your current mortgage rate.

“If your kids are done with college or your income has gone up and you have some more savings capacity, instead of paying down the low-rate mortgage faster, another conservative approach is to put that money in a money market account” that yields a few percentage points more than your mortgage rate, says Roger Young, thought leadership director at T. Rowe Price. “Do that automatically for a while.” The extra savings will be easier to access than they would be if tied up in your house.

Though money market funds have the advantage of liquidity — you can cash them in almost instantly without any cost or penalty — the downside is that there’s no guarantee that their yields will stay high for long. Another tactic is to instead purchase U.S. Treasury debt, which has a guaranteed yield over the life of the note, thus locking in a rate for longer. (Seven- and 10-year notes currently yield about 4 percent.) You’ll get the full value of the bond if you ‧hold it to maturity.

A related investment strategy, known as laddering, is to buy a series of different bonds maturing in different years — for example, three, five and seven years from now. “Bond yields are higher now than they’ve been in over 15 years,” says Michelle Morris, a financial planner with Brio Financial Planning in Quincy, Massachusetts. “Instead of prepaying a mortgage costing 3 percent, use the cash to buy a Treasury bond ladder paying more. There’s no rule against having a mortgage in retirement.”