I’ve had an insightful realization for those who use automatic mortgage payments and also opt to pay extra principal each month. It’s crucial to remember to adjust your automatic mortgage payment amount downwards when interest rates rise.
In 2019, I refinanced my primary residence with a 7/1 ARM at 2.625% without any fees, moving down from a 5/1 ARM at 2.875% secured in 2014. My strategy with an ARM includes paying additional principal each month. So, rather than just the standard $2,814.14 mortgage payment, I chose to automatically pay $4,500 each month, contributing an extra $1,685.59 towards the principal over and above the $1,847 already going towards it from the regular payment.
This strategy of paying down debt automatically ensures steady financial progress and eventually leads to owning a valuable asset that could generate rental income.
However, since 2019, mortgage rates have risen due to various economic factors. Despite advising against extra principal payments in such a scenario, I found myself still making these higher payments. Recognizing this inconsistency, I contacted my bank to reduce my payment back to $2,814.14. Paying extra during times of high interest rates and inverted yield curves is less advantageous, as it diminishes liquidity when it might be needed most.
Managing over 40 financial accounts, it’s easy to overlook such adjustments. I use automatic payments to avoid missing due dates, but this can sometimes lead to missing out on adjusting payments in response to changing conditions. Regular financial reviews using wealth management tools are essential to stay on top of such changes.
While paying an additional $1,685.59 for 48 months (totaling $80,908.32) accelerated my mortgage payoff, I could have potentially earned a higher return on Treasury bonds during this period. However, this extra payment also shielded me from potential market losses.
If you have an ARM, you might feel more inclined to pay off your mortgage quickly, unlike with a 30-year fixed mortgage where there’s less urgency. But it’s important to reassess this strategy when interest rates change.
Resume paying extra principal when rates are low and the yield curve is normal. This is particularly advisable when Treasury bond yields are equal to or lower than your mortgage rate. Another good time is when you have strong cash flow and savings, with no clear investment alternatives.
Ultimately, most of us will proactively seek ways to improve our finances when necessary. This realization led me to reevaluate and adjust my mortgage payments, freeing up significant cash flow. In times of financial need, we tend to find ways to save more, reduce costs, or increase income, a behavior that benefits us in the long run.
