Your Mortgage is Not a Hedge Against Inflation

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Homeowners should take a total-balance-sheet view when evaluating options for their mortgage.

The 30-year fixed rate mortgage in the U.S. is one of the best financial deals available anywhere in the world, providing a government-subsidized interest rate, generous tax breaks for many borrowers, and a valuable refinancing option. Since its introduction in 1934, it has played a central role in the growth of American homeownership.

For many households, the decline in interest rates since the 1980s has also prompted a recurring set of financial planning questions related to their mortgage: Should I prepay the loan? Does it make sense to make extra principal payments? Should I refinance and when? Should I extract equity from my home with a bigger or second loan? Should I tap the equity in retirement through a reverse mortgage?

The recent upturn in mortgage rates and inflation, to the extent it foreshadows a longer trend, will raise a different set of questions: Does it make sense to prepay an existing below-market-rate mortgage? Should I opt for an adjustable-rate loan for a home purchase? Am I building equity in my home? What should I do with an existing reverse mortgage line of credit?

The answers to all these questions depend on the risk tolerance, goals, and time horizon of each client. But in each case, they should be answered by focusing on the entire household balance sheet.