Financial strategies evolve with the direction of the economy. Back in the early 90's it was considered a good financial strategy to prepay your home mortgage. Many financial experts considered it a good return on your cash - to pay down a mortgage that may be as high as 10%, rather than invest in more volatile equities. Afterall, the certainty of saving 10% by prepaying your mortgage is just as good (perhaps even better) as earning 10% on a stock and comes without the volatility of the stockmarket or the capital gains taxes.
However, with many home loan rates at historical lows (most range between 4.5% and 5.5% these days) there are now better places to stash your cash. The best places to start are with your credit-card debt and by feeding your retirement account. By paying down your higher rate credit card debt you are, in essence, earning a higher return on your cash than by prepaying your mortgage. The fact is, that if you have a credit card that charges you 19% (these rates have been going up) and by re-allocating excess cash flow towards paying the balance off, you avoid paying that interest and therefore are essentially 'earning' 19% on your money. I'll take a 19% return over a 5.5% return any day!
Depending on the amount of consumer debt that you carry and your availability to excess cash, the process of paying down debt can take quite some time. It may be worthwhile for you to consider simultaneously starting a savings plan that will help prevent you from falling back into the credit card cesspool.
Once you've conquered your debt, build a rainy-day fund and then buy enough disability and life insurance to protect your family from unforseeable health set backs. Then it's time to look at the mortgage. Got a fixed 6.5 percent rate? You coulde probably do better, in the long term, in a low-cost diversified mutual fund. Finally, if you got trapped in one of those variable-rate, interest-only, negative amortization mortgages that were being pushed in the early part of this decade, prepay as soon as possible by refinancing to a more stable loan and reallocating your excess cash elsewhere.
Consult a qualified Financial Advisor to discuss your specific situation.
Author: Randall Filbert, MPA
www.LendingIdaho.com www.FamilyGuideToFinances.com www.BuyandSellinIdaho.com
This blog's intention is to provide inspirational stories as well as historical accounts and insight into matters concerning the mortgage and real estate markets. These are my opinions and should not be regarded as factual data.
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