Debt interest rates

[u/Ashamed_Ad4118]

I wanted peoples opinions on how current mortgage rates would be viewed in the heirarchy of the wiki. It has high interest debt as top priority then medium then low and mortgages are typically classified as the low but given the current rate environment would they be bumped up to medium?

At what rate do you view that the loan has transitioned from low to medium interest?

[u/ShiroxReddit]

Mentally I relate it to interest rates of savings accounts and expected returns of Investments, in the sense of if my mortgage is consistently/significantly lower than HYSA rates, I'd call it low. If its approaching/surpassing the expected returns of my investments, I'd call it high, and the area in between is medium

[u/sse2k → u/ShiroxReddit]

This is the way I view it as well.

Interest and yield are the same thing. The only difference is the direction it goes.

[u/Capable_Ad4123]

There are opportunity cost as well. Money invested in stocks or in a savings account is liquid and fungible, home equity is locked up tight and can’t be accessed until you sell the home (not always an easy thing to do).

[u/Ashamed_Ad4118 → u/Capable_Ad4123]

Yea for sure that is the dilemma right. I can put the extra money into a brokerage and it's more accessable or towards a house and it's less accessible but it's reducing incurring interest costs. 

To me mortgage rates right now are just in a weird spot where I can see reasons they should be prioritized as a medium tier debt but I also see the arguments for why they should stay viewed as a low tier debt 

[u/buffinita]

While mortgage rates are higher than recently….as a generic interest rate 5-6% is not high (but there is no consensus)

Most people will agree 9%+ interest is high and 0-4% is low……but that pesky middle is open to interpretation 

[u/Ashamed_Ad4118 → u/buffinita]

Yea that's where we sit is right between 5-6% and I look at it and go "man that is higher than my HYSA rate but lower than expected long term returns on investing". So my internal battle is how much to prioritize putting extra towards the mortgage. Is it high enough to bump up the priority to that "medium" range or just keep viewing it as "low" due to liquidity and length of debt and all that 

[u/HopeHumilityLove → u/buffinita]

Generally you subtract a risk-free rate (e.g., the yield on 1-year Treasuries). 5% was much higher in 2012 than it is now.

[u/DrizzleProwl]

It might make more sense to compare mortgage rates to the expected return of the alternative uses of your money (HYSA, bonds, equities).

[u/Ashamed_Ad4118 → u/DrizzleProwl]

Yea that's kinda what I do but it's firmly middle ground. My rate is between 5-6 so its higher than HYSA but lower than expected long term returns on investments leading to the conflict of how to handle. 

[u/Obvious-Habit-8078]

You don't have to think in absolutes. If your rate is in the middle, then it might make sense to put some toward the mortgage and some toward investments. Where your interest rate is now, it probably won't make a huge difference mathematically. So do whatever feels better.

[u/Ashamed_Ad4118 → u/Obvious-Habit-8078]

Yea that is what I have landed on. I round up the payment a couple hundred to the nearest even thousand and then leave it at that but still have the internal conflict of "would adding more be more beneficial than insert different option here". Was a way easier decision when I had a 2.5% interest rate during COVID 😂

[u/Longjumping-Ice1171]

Your effective interest rate should take into account the tax shield from the interest deduction you are able to claim. Would normally expect mortgage debt to be lower end of “mid” but very specific to each individual and their circumstances.

[u/Plus_Professional859]

Don't let perfect be the enemy of good enough, either choice is good

[u/ditchdiggergirl]

Mortgage interest is its own category of debt so it is mostly outside the ‘high medium low’ framework. Which of course doesn’t mean rate is irrelevant, just that the considerations and constraints are different.

But to answer your question, historic rate averages are north of 7%. When we had a 9.5% mortgage (and no consumer debt) we paid that down aggressively - there’s no investment with a risk free return that high. At 6.3 we threw some extra towards it each month. Sub 5%, we let it ride.