My friends are homeowners that are finally taking the plunge and knocking down their current house and building anew on their plot of land. The construction to perm loan will likely start in May/June, however, since they haven’t paid off their existing mortgage, the bank will be buying them out at today’s interest rate.

Their existing mortgage is about $250K at 3.75%, which is obviously more favorable than today’s rates, roughly 8% (and it will likely climb further by next spring).

We were discussing investments, and they explained they are not currently investing as they are pouring all of their current income into paying down their mortgage before being bought out and having to pay the new, higher rate.

They way I see it, they can put $20K+ ($10K for each of them, and they have kids, too, so maybe more) into I bonds and get a 6.89% return on their money. Mathematically, that would be preferable to the 4.25% (8%-3.75%) advantage in paying down their mortgage.

Am I assessing the situation correctly? Just want to make sure I’m giving them sound advice. Thank you in advance!