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The best real interest rate yield you can get is probably paying down one of your loans

Posted by John Reed on

I recently said here that if you pay down a loan, the return you get on your payment is the interest rate you no longer pay on that amount. My wife and I got a reverse mortgage that is at 9.4%. She intends to pay it down from time to time from her mandatory 401(k).
I have also said that at any given time with regard to any interest rate whether you are buying, selling, borrowing, or lending that your real interest rate is the nominal rate written on the loan documents MINUS the inflation rate.
What is the inflation rate? I am not sure we know anymore. The Bureau of Labor Statistics keep changing it to make it better they claim. In fact, they change it to make the Oval Office incumbent look better.
At present, the BLS says the most recent inflation rate annualized to twelve months. As of today, inflation is 3.67% the BLS says.
That mean our real RAM interest rate is 9.4% - 3.67% = 5.73%. And that is the return we get on paying it down.
So we should compare that real return of 5.73% to alternatives for that money. And when we consider other assets to invest in, we need to also convert those nominal rates to the real rate.
So if you are bitching about a lousy return you are getting somewhere in your balance sheet, and you are paying a loan somewhere in your balance sheet, see what the real rate is on that loan. If that is higher than the best yield you are getting on some asset, use that low interest asset or other money to pay down the loan.
I keep telling readers to get a home with a mortgage. Generally, after you adjust home appreciation rate, mortgage payment, and mortgage balance for inflation, your home is your best investment so you should NOT pay down that mortgage.

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  • Glad to see some new posts. Always enjoy when you comment on recent issues.

    Rob on

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