Graham Stephan, a popular YouTube personality, real estate agent, and investor, recently tweeted that the best investment to make last year was a 30-year fixed interest mortgage. “The biggest irony now is that out of all options, the best investment you could have made in 2021 was a 30-year fixed interest mortgage at ~2%.” What does he mean by this tweet?
Mortgage rates more than double
Mortgage rates have more than doubled to 6.66% from 3.11% year to date as the Fed has raised interest rates five times this year. Mortgage rates hit an all-time low of 2.65% in January 2021 as the Fed grappled with the economic impacts of COVID-19. At 2.65%, the monthly cost for a $500,000 home loan is $2,015 a month with no down payment and without counting taxes and insurance.
During the time of Stephan’s tweet, mortgage rates were 6.29%, almost 2.5 times more than the ~2% he references. At that rate, the same $500,000 mortgage would cost $3,092 per month, a difference of $1,077 per month, or close to $13,000 a year. Over the life of this loan, you would be paying about $613,000 in total interest. This is 2.75 times more than the $225,300 total interest you would have paid on the loan at 2.65%, or about $388,000 more in total!
Performance of asset classes
The performance of different investments changes dramatically from year to year. In 2021, the best performing investment was commodities, returning 38.5%. REITs (real estate investment trusts) was a close second at 32.5%, followed by U.S. equities at 27%. The worst performing investments were Chinese equities, losing 21.6%.
If you had refinanced your home in 2021 at all-time low interest rates and enjoyed the increase in home prices of 40% since January 2020, it could mean investing in a 30-year fixed interest mortgage would have potentially outperformed commodities in 2021. The return would depend on what your interest rate was beforehand and the purchase price of your house.
Refinance vs. purchase
Stephan’s tweet most likely applies to those who refinanced their homes in 2021, rather than those who purchased them last year. 2021 home prices continued to hit all-time highs until peaking in May 2022. With the cost of mortgages so high, demand for new homes has recently dropped, leading to home price appreciation slowing.
The accuracy of Stephan’s tweet is dependent upon home prices remaining stable, as well as the price you paid for your home and future interest rates. If there is a large drop in home prices, it may be better to buy a home at today’s higher mortgage rates. However, housing prices would have to come down substantially for a mortgage with a higher interest rate to make sense. A $500,000 loan at 2.65% would have the same monthly payment as a $313,000 loan at 6.66%.
By locking in a low interest rate for 30 years, those who took advantage were able to ensure that their monthly payments will stay relatively stable and that they won’t have to worry about rate hikes causing their payments to increase. However, purchasing a home ties up your money. Ultimately there are many variables that can impact your investment returns. Buying a home is a big financial move and one of the most expensive purchases you will make in your life. The decision to buy a home should be based on your personal financial situation. Prospective home buyers also need to consider other expenses of home ownership, including property taxes, maintenance fees, and homeowners insurance.
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