If you’re a homeowner looking to live for free, buying Treasury bonds today just might be the key.
Once you’ve got your housing expenses under control, life becomes much easier. One of the obvious benefits of owning a house with a fixed-rate mortgage is that your mortgage stays the same as rents increase.
However, now that interest rates have risen, it may now be prudent to buy U.S. Treasury bonds to actually live for free. The 10-year Treasury bond yield has risen to about 2.8%. If your mortgage rate is below that amount, you’re on easy street.
I’m assuming most homeowners with a mortgage refinanced since 2019 to lock in a lower rate. Some lucky folks were able to get 30-year fixed-rate mortgages for 2.8% or less. Meanwhile, the vast majority of people who took out adjustable rate mortgages locked in rates at under 2.8%.
Buying U.S. Treasury Bonds To Live For Free
In my case, I purchased a primary residence in 2020 with a 7/1 ARM at 2.125%. Therefore, I could use whatever cash 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 worth of 10-year Treasury bonds. To completely eliminate risk, I would have to hold the Treasury bond until maturity.
Of course, I could always just pay down extra principal for a guaranteed 2.125% return. But buying a 10-year Treasury bond after a large decline is enticing. Not only can I guarantee myself a 0.675% higher annual return if I hold until maturity, I also have the potential to sell the bond for a profit if rates decline.
For most homeowners with a mortgage, we should consider allocating more of our idle cash to risk-free assets such as Treasury bonds and I-Bonds as part of our regular asset allocation strategy. Even though we are still earning a negative real interest rate due to higher inflation, the returns are all relative.
It was a no-brainer to buy $10,000 worth of I Bonds at the end of 2021 for a guaranteed 7.14% return through April. And it’s a no-brainer to buy another $10,000 worth of I-Bonds this year with an even higher guaranteed return.
Never decline free money!
Buying Bonds In The Past To Try And Live Cheaper
Back in 2017, I sold a rental property because I no longer wanted to spend any time managing it. It wasn’t because I was bearish on the real estate market. It was because I had become a new father. The tenants were driving me nuts and there were also a lot of upcoming maintenance issues.
I reinvested 40% of the proceeds into stocks, 30% of the proceeds in real estate crowdfunding, and 30% of the proceeds in AA-rate California municipal bonds. The municipal bond investments were my way of locking in some low-risk and tax-free passive income while 70% of the proceeds sought higher returns.
The blended 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 that I ultimately refinanced to a 7/1 ARM in 2019 at 2.625% with all the fees baked in. (This is a different house from the one above with a lower 7/1 ARM rate.)
The returns were steady until the bond market rout in 2022. For example, the California Municipal Bond Fund (CMF), which I don’t own, is down about 8% YTD.
However, my municipal bonds have done its job of paying an annual 3% tax-free coupon (~4.2% gross yield). My plan has always been to hold the municipal bonds until maturity for steady passive income.
I just want to point out there is risk in even low-risk investments. Therefore, stay vigilant in your capital allocation strategy. If you hold a bond to maturity, you won’t lose money on your principal. But if you hold a bond fund, there is no maturity and you are subject to the ups and downs.
A Psychological Win For Homeowners
The reality is, most consumers don’t have enough cash to instantly pay off their mortgage. It’s why home buyers took out mortgages in the first place! Therefore, this idea of living for free by buying Treasury bonds is mostly an academic exercise.
However, even if you don’t have enough cash to completely pay off our mortgage or invest in Treasury bonds, you are still benefitting. Just having the optionality of being able to earn a higher risk-free return than the cost of our mortgage debt improves consumer confidence.
It’s kind of like having the option to earn more money at a new firm for many years if you want because you’re pals with the CEO. Or maybe it’s like having a trust fund ready to bail you out if you fail at an entrepreneurial endeavor. But you elect 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 arbitrage and live for free is a bullish indicator for the economy. But the public needs to realize this fact first.
Homeowners have already benefitted by a tremendous rise in property values since 2020. Now it’s time to let things cool and enjoy cheaper, lower-risk living. This way, you’re always winning!
For more nuanced personal finance content, join 50,000+ others and sign up for the free Financial Samurai newsletter. To get my posts in your inbox as soon as they are published, sign up here.
