Thanks for the response Gene.

Regarding the fact that mortgages are no longer callable and that rules of thumb (and such “luminaries” as Dave Ramsey and Robert Kiyosaki) have failed to catch up, you’re dead on.

Regarding accelerating payments when interest rates are high, I respectfully and most firmly disagree. Actually, those times are the best times to *not* prepay principal. Here’s why…

Typically, mortgage interest rates are high when inflation runs high. This means that dollars owed lose value more rapidly than when inflation is low. However, your mortgage interest deduction is based on nominal dollar interest, so you’re rewarded more for that interest.

Let’s compare two scenarios. In scenario A, inflation is 2%/year and the mortgage interest is 4%/year. In scenario B, inflation is 7%/year and the mortgage interest is 9%/year. Let’s assume that in both cases, your marginal tax rate is 30% (federal, state, and local combined) and that your mortgage balance is under the $750,000 deductibility limit.

In scenario A, you pay 4% interest for the year, but your deduction returns to you 30% of that, so your real cost is 2.8%. After adjusting for inflation, your real cost is 0.78% (the formula is (1.028/1.02–1)).

In scenario B, you pay 9% interest for the year, but your deduction returns to you 30% of that, so your real cost is 6.3%. After adjusting for inflation, your real cost is -0.65%, meaning that you’re actually profiting just under 2/3 of 1% on hundreds of thousands of other people’s dollars.

If for some reason you can’t deduct that mortgage interest, the math shows that your inflation-adjusted cost is 1.96% in scenario A, and 1.87% in scenario B, so you’re ever so slightly less behind when inflation and interest rates are high.