An attempt to entice Mortgage Pay Off folks here with Series I Savings Bonds :)

[jnw]

I was a Mortgage Pay Off folk; (I still am really.)  But now I am putting $10k into I-Bonds first instead.  The new CPI was released today and well the next composite interest rate for Series I Savings Bonds on May 1st will be 9.62%.

If you invest $10k now into Series I Savings Bonds -- before the end of this month -- you will get 7.12% for 6 months on that $10k, followed by 9.62% for another 6 months.  This amounts to $854 earned on $10,000 in 12 months. 

This 8.4% guaranteed avg return rate should beat the worst of mortgage loans here handidly :)  I know it beats mine at 4.625%.

So I am putting all my spare cash into the I-Bonds first.. already have $7k into them this year and gonna try and squeeze in another grand before the end of the month.

But you have to buy these Series I Savings Bonds before the end of the month to lock in the 7.12% followed by 9.62%.

Just thought I'd share. I know many here probably won't even care about the interest rates and no matter what just pay off the mortgage.  But you could after say 14 months and a few days redeem the $10,854 I-Bond and use that towards principle in mortgage next year :)  But you may want to keep the money in the I-bonds even long if the inflation continues to be extraordinarily high like it has been.

These I-Bonds really make sense for the Mortgage Pay Off folks because it is risk free, guaranteed relatively high return rate and you will actually have full access to the money 14.5 months from now, unlike if it is dumped into the equity of home.

If you are married you can put $20k in I-Bonds this year.

[Affable Bear]

Not sure if we have something similar over here in the UK, we probably do! I should get looking..

I also struggle between the emotional battle of having a paid off house vs. better using the money in investments. In a low interest rate and high inflation economy does it ever make sense to pay off a mortgage?

We are coming up to the end of our fixed 2 year deal in July (we don't generally have long 15+ year fixed mortgages here) and I have been playing with the idea of either taking money out or extending the length of my mortgage from 19 years all the way up to 35+ and investing the difference.

I would seriously consider an interest only mortgage over say 35-40 years as inflation would destroy the loan value, meanwhile my compounding investments are going to the moon strolling up the hill. Havent quite got the bravery for that one yet though and psychologically it will be debt for another 35 years even though I know it makes sense on paper.

[MustacheAndaHalf]

Technically, you can overpay taxes by $10,000 and then request your tax refund be sent as $5,000 of series I bonds for each spouse.

[ChpBstrd]

I agree this is a reasonable idea for one's long-term bond duration, but here are two caveats and one opportunity:

Caveats:

1) Your money is locked up for a minimum term of ownership of one year, making I bonds unsuitable for emergency funds. If you sell before 5 years, you forfeit the previous 3 months of interest.
https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

You might not miss those 3 months of coupons if the broader bond markets are right and the 5-year breakeven rate for inflation turns out to be 3.3%.
https://fred.stlouisfed.org/series/T5YIE

That prediction really raises eyebrows when you do the math and figure out how low the market must be expecting inflation to go to hit that 5y average after this period of 8.5% inflation. It would take one year of 8.5% followed by four years of 2% to average 3.3%, based on non-compounding napkin math.

2) Going long housing, long I bonds, and short a mortgage is a pro-inflationary trade. If in the next couple of years monetary velocity collapses and we get disinflation instead, your house could lose value at the same time as your I bonds stop providing any meaningful yield (and maybe at the same time rising unemployment makes it harder to earn a living). That may seem fanciful in light of today's headlines, but when one considers the effect rising interest rates are going to have on financial institutions' bond and mortgage holdings, not to mention their stock, crypto, and derivative holdings... a 2008-sized blowup by a financial institution somewhere seems quite possible.

Still, at least your I bond investment would return your principle in this scenario, which is more than we can say for most other asset classes. So if you're going to risk owning the house regardless, then the decision to invest in I bonds does not add more risk. The worst I can say is that maybe the 1 year lockup or the 5 year penalty could deter you from rebalancing as stocks fall.

Opportunity:

There is a (perhaps temporary) hack married couples can use to lock in today's rates for next year's I bond allocation:

https://www.doctorofcredit.com/gifting-us-treasury-bonds-to-circumvent-10000-limit-i-bonds/

[Scandium]

This is great for the next year (or more, depending). But keep in mind that a year ago I-bonds had a yield of 1.06%. And before that hadn't been above 3% since 2011

[jnw]

This is great for the next year (or more, depending). But keep in mind that a year ago I-bonds had a yield of 1.06%. And before that hadn't been above 3% since 2011

Yeah plan is to only contribute to I-Bonds while the interest rate is higher than my mortgage rate.  I like that I have access to the money a little over 14 months down the road, unlike mortgage payment where you are locked out of that cash.   It does seem good for an emergency fund to me because the average interest rate on these bonds have been very good compared to the 2% interest I got on my savings back in 2018 with Ally.  I am super comfortable knowing my cash is protected from the crazy inflation we've been having.

[Mr. Green]

You and your spouse can buy 10k each in I Bonds this year, and you can also gift each other next year's 10k. The bond starts now at today's rates but it sits in your TreasuryDirect gift box until next year when you can give them to each other, fulfilling that year's 10k limit. Technically you can buy as much in gift bonds as you want but the recipient can only receive up to their 10k limit per year so it would take multiple years to distribute a larger gift amount, which may not be the more efficient use of that money.

[Askel]

I've long been in the "pay off your mortgage" camp, and I'm also in the "buy i bonds first" camp as well, but some perspective is in order.... 

The difference made in my net worth between the $9k I put in bonds last year vs putting that on my mortgage is basically beer money- a couple hundred bucks.  Nothing to sneeze at, but not a huge loss if there are other reasons you want some more equity in your house.   

[jnw]

I've long been in the "pay off your mortgage" camp, and I'm also in the "buy i bonds first" camp as well, but some perspective is in order.... 

The difference made in my net worth between the $9k I put in bonds last year vs putting that on my mortgage is basically beer money- a couple hundred bucks.  Nothing to sneeze at, but not a huge loss if there are other reasons you want some more equity in your house.

For me for the next 12 months, on $10k, it amounts to an extra $390 or so in difference.  I won't pay any state or federal on that since income is low.

[sisto]

I've been in the don't pay off your mortgage camp until recently. I ended up in a position that I didn't anticipate. I ended up on disability and have higher income than I had planed for, definitely a good problem to have. So now I'm planning to us my cash buffer to pay the mortgage so I have less to draw down because the drown down is ordinary income. So it definitely makes more sense to pay less in taxes by not having to draw money to pay the mortgage.

[bacchi]

You and your spouse can buy 10k each in I Bonds this year, and you can also gift each other next year's 10k. The bond starts now at today's rates but it sits in your TreasuryDirect gift box until next year when you can give them to each other, fulfilling that year's 10k limit. Technically you can buy as much in gift bonds as you want but the recipient can only receive up to their 10k limit per year so it would take multiple years to distribute a larger gift amount, which may not be the more efficient use of that money.

Now this is a nice strategy. Thanks for the tip!

[Mr. Green]

You and your spouse can buy 10k each in I Bonds this year, and you can also gift each other next year's 10k. The bond starts now at today's rates but it sits in your TreasuryDirect gift box until next year when you can give them to each other, fulfilling that year's 10k limit. Technically you can buy as much in gift bonds as you want but the recipient can only receive up to their 10k limit per year so it would take multiple years to distribute a larger gift amount, which may not be the more efficient use of that money.

Now this is a nice strategy. Thanks for the tip!

There was discussion on this on Bogleheads.org and someone calculated that even if interest rates were to drop to zero when they reset in November, an I Bond purchased now for 2024 would still earn a 5% total return by January 2024, when you could then cash the bond out with essentially no penalty since the penalty is the most recent 3 months interest. I personally can't fathom that we'll have entirely squashed inflation in 6 months, even if it was ultimately some kind of transitory, but this is possibly a reason to purchase 2024's gift 10k as well. I'm considering it.

[HPstache]

To be fair, you would not have $854 in interest if you cashed out after the first year... you would forfeit 3mo worth of interest to pull it out before the 5 year mark, correct?

Edit: You would also pay federal income tax on the interest as well if I understand correctly.  All things to consider, but yes... probably still better than your mortgage interest rate.

[simonsez]

I've long been in the "pay off your mortgage" camp, and I'm also in the "buy i bonds first" camp as well, but some perspective is in order.... 

The difference made in my net worth between the $9k I put in bonds last year vs putting that on my mortgage is basically beer money- a couple hundred bucks.  Nothing to sneeze at, but not a huge loss if there are other reasons you want some more equity in your house.

For me for the next 12 months, on $10k, it amounts to an extra $390 or so in difference.  I won't pay any state or federal on that since income is low.

Just a FYI, I Bonds are tax exempt at the state and municipal levels regardless of income level.

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_itaxconsider.htm

[jnw]

To be fair, you would not have $854 in interest if you cashed out after the first year... you would forfeit 3mo worth of interest to pull it out before the 5 year mark, correct?

Edit: You would also pay federal income tax on the interest as well if I understand correctly.  All things to consider, but yes... probably still better than your mortgage interest rate.

Yeah you'd have to draw out in just over 14 months to avoid the penalty -- around 14.5 months if you bought today.  If you buy towards end of this month the interest starts April 1st of this month.   But I'm thinking inflation might still be bad and will just keep it in.. perhaps even for years if it remains higher than mortgage interest rate.  Eventually 3 months interest might not amount to much if it is several years at a higher interest rate vs. mortgage.

I really like that you have access to the cash still, after 14.5 months, (if you need it) unlike when you put it all into the mortgage equity.

Fortunately I am in low income bracket so I can gain like $11.6k in interest without paying anything to federal.   The interest I pay on home also doesn't help me with my taxes, since I take the standard deduction.

[Mr. Green]

Even at 15 months there will be a penalty. The penalty lasts all the way to the 5 year mark. The only way to "avoid" the penalty before that is if interest rates dropped to zero. Then your penalty after 3 months at that rate would be zero.

Since the penalty is the most recent 3 months of interest, if interest rates reset significantly lower in November (or any following reset month for that matter), it would make sense to wait 3 months to cash out so you collected the last 3 months at the higher interest rate and forfeit the 3 months at the lower rate. If the new interest rate come November is still really high you can just let the bond ride.

[The Hin]

That information about buying I Bonds and holding them as gifts until disbursed *and they start earning interest as of the date of purchase* is pretty great in an environment like now where I Bond terms look really enticing.

My wife and I both purchased $10K in I Bonds for 2022 - sounds like we could each buy $10K more held as gifts and lock in the current 7%+ rate and then 9%+ for the next period, and then gift them to each other in future (2023 or later). As a point of clarification - let's assume my wife and I bought I Bonds to gift to each other now, and they've accrued let's say $500 interest each by the time 2023 rolls around. We can only gift $10,000 each year max to each other, right? So that means we could gift $10K in January 2023 but then will each have some residual chunk of I Bonds sitting our gift accounts?

[Mr. Green]

@The Him The 10k is the purchase limit so the gifted bond is still considered 10k of the recipient's limit, regardless of interest accrued.

[The Hin]

@Mr. Green In reading https://www.doctorofcredit.com/gifting-us-treasury-bonds-to-circumvent-10000-limit-i-bonds/ it states in part:

For example: Jane and Dave are a married couple with shared finances. Each of them has already bought $10,000 in I Bonds for 2022. Jane can buy an additional $10,000 (or whatever amount) during March 2022, with the gift being fully executed to Dave in January 2023. Since Jane bought the I Bonds during March 2022, the bonds will begin accruing interest at the March 2022 rate and the 12-month lock-up period will be calculated based on the March 2022 date.

Dave can also do the same and buy $10,000 in bond gifts in March 2022 which will be given to Jane in January 2023.

You probably don’t want to buy huge volumes of gifts since it’ll then take years before the recipient will be able to receive the gift and break the bond since the recipient can only get $10,000 per year.

I took the phrase "break the bond" to mean that if I bought $10,000 in I-Bonds today to hold in my gift account and it's worth $10,500 in January 2023, I can only transfer a maximum of $10,000 of I-Bonds in that year to the recipient so $500 will be left sitting in my gift account until the recipient is eligible to purchase/receive more bonds the following year.

[Mr. Green]

@The Hin "breaking the bond" is the formal term for cashing it out.