Categories: Business

Money well Spent with Lee Kent . . .

I recently refinanced my mortgage down to a 4.25% rate for 30 years. Should I start paying extra towards the principle to decrease the time before I am debt free?

In a different time I would say yes. The more you put toward your mortgage, the sooner you would be debt free. However, the way things are now, I would pay it as agreed for the entire 30 years. I say this because interest rates are being held artificially low by the Federal Reserve. It won’t be too long before rates will have to rise.

Back in 1981 the 30-year mortgage rate was as high as 18%. If those rates were to come back, your mortgage payment would be over three times as much. For example, a $150,000 mortgage at 4.25% would have a payment of around $700. At 18% the payment would be over $2,000. Basically, mortgages are on sale right now and it is a good time to lock in the cheap money while you can.

On the flip side of borrowing are savings. The interest paid on savings accounts right now is so low that you can call it non-existent. Once rates begin to rise, so too will savings rates. I remember earning 7% on my savings just over 10 years ago. I really miss that…

How is this for an idea? Instead of putting extra money towards your mortgage, put it in a savings account.
As crazy as it may sound, if savings rates were to rise to 7%, you would earn a 2.75% profit on every dollar not paid towards the mortgage. If rates were not to rise in the future, you can always put the money toward your loan then. At least this way you have the option.

Just make sure you do put it up and not spend it…

Lee Kent

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Alan Fowler says:

May 23, 2011 at 3:18 pm

Would you recommend refinancing a bank equity loan now if I could lock in a lower rate? The bank has it at 7.5% and I think I could get a better rate with a mortgage company. what do you think? Alan