If you are a homeowner who wants to live for free, buying government bonds today may be the key.
Once you have your housing costs under control, life becomes a lot easier. One of the obvious benefits of owning a home with a fixed-rate mortgage is that your mortgage stays the same as rents rise.
But now that interest rates have risen, it may be wise to buy US Treasuries to truly live for free. The yield on 10-year government bonds has risen to about 2.8%. If your mortgage rate is less than that amount, you’re on the right track.
I’m assuming that most homeowners with a mortgage that has been refinanced since 2019 will hold a lower rate. Some lucky people were able to get 30-year fixed-rate mortgages for 2.8% or less. Meanwhile, the vast majority of people taking out adjustable-rate mortgages locked rates at less than 2.8%.
Buy US Treasuries to Live Free
In my case, I bought a primary residence in 2020 with a 7/1 ARM of 2.125%. Therefore, I could use all the money I have to buy a 10-year Treasury bond to cover my mortgage interest and then some.
Let’s say my mortgage balance is $1 million and I have $200,000 in cash. I can cover 20% of my mortgage balance by buying $200,000 in 10-year Treasury bonds. To completely eliminate the risk, I would have to hold the Treasury bond until maturity.
Of course, I could always just pay extra principal for a guaranteed return of 2.125%. But buying a 10-year Treasury bond after a big decline is tempting. Not only can I guarantee myself a 0.675% higher annual return if I hold to maturity, I also have the potential to sell the bond for a profit if interest rates fall.
For most homeowners with a mortgage, we should consider allocating more of our idle cash to risk-free assets such as government bonds and I-bonds as part of our regular asset allocation strategy. Even though we are still earning negative real interest rates due to higher inflation, the returns are all relative.
It was a good idea to buy $10,000 worth of I-bonds at the end of 2021 for a guaranteed return of 7.14% through April. And it’s a good idea to buy another $10,000 in I-Bonds this year with an even higher guaranteed return.
Never refuse free money!
Buying bonds in the past to try and live cheaper
In 2017 I sold a rental property because I no longer wanted to spend time managing it. It wasn’t because I was bearish in the real estate market. It was because I had become a new father. The tenants were driving me crazy and there were a lot of upcoming maintenance issues as well.
I reinvested 40% of the proceeds in stocks, 30% of the proceeds in real estate crowdfunding, and 30% of the proceeds in California AA-rated municipal bonds. The municipal bond investments were my way of capturing low-risk, tax-free passive income, while 70% of the yield sought higher returns.
The mixed interest rate on the individual municipal bonds was about 3% tax-free, while my primary mortgage rate at the time was 2.875%. I had a 5/1 ARM which I eventually refinanced to a 7/1 ARM in 2019 at 2.625% with all costs baked in. (This is a different home from the home above with a lower 7/1 ARM rate.)
Yields were stable until the bond market route in 2022. The California Municipal Bond Fund (CMF), which I don’t own, for example, is down about 8% YTD.
However, my municipal bonds have done their job by paying a 3% annual tax-free coupon (~4.2% gross yield). My plan has always been to hold the municipal bonds until maturity for a fixed income.
I just want to point out that there are risks even with low-risk investments. Therefore, remain vigilant in your capital allocation strategy. If you hold a bond until maturity, you will not lose any money on your principal. But if you hold a bond fund, there is no maturity and you are subject to ups and downs.
A psychological victory for homeowners
The reality is that most consumers don’t have enough money to pay off their mortgage right away. That’s why home buyers have taken out mortgages in the first place! Therefore, this idea of living for free by buying government bonds is mainly an academic exercise.
But even if you don’t have enough money to pay off our mortgage in full or invest in government bonds, you still benefit. Just having the opportunity to earn a risk-free return higher than the cost of our mortgage debt improves consumer confidence.
It’s like having the option to make more money at a new company for years to come if you want because you’re friends with the CEO. Or maybe it’s like having a trust fund ready to bail you out if you fail in a venture effort. But you choose not to tap it out of pride.
When consumers have more options, consumers tend to spend more money and live less stressful lives. Therefore, this ability to arbitrate and live for free is a bullish indicator of the economy. But the public must first realize this fact.
Homeowners have already benefited from a massive rise in property values over the past two years. Now is the time to cool things down and enjoy a cheaper, lower-risk life. That way you always win!
Related post: Negative Real Mortgage Rate Means You’re Not Paying Extra Principal
Readers, someone who lives for free by making more from his risk-free investments than he pays on his mortgage? Are you taking advantage of a higher interest rate by buying a number of bonds?
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This post Time for homeowners to buy government bonds to live for free
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