Free Money!
Table of Contents
Free Money!
I knew I’d grab your attention with a title such as Free Money. That said with such a teaser I better deliver. Now, in life, we often hear the term “free money”. For instance, betting on my Eagles or Sixers to choke is generally free money. However, generally in life, it is hard to come by truly free money. Unless you have one of those phone booth machines where you have to collect as much money in a wind tunnel as possible in 1-minute, free money is hard to come by.
The good news for most people reading this today is we actually are in the midst of an extremely rare “free money” environment. Not everyone is taking full advantage of it, thus the title and theme for today’s lesson.
Refinancing
Let me explain shall I? Raise your hand if prior to 2023 you bought or refinanced your home. I’m guessing the vast majority of people reading this have done so. If that is the case, then you likely have a sub 4% mortgage if not sub 3.5% or even 3% mortgage. For instance, I refinanced my primary home twice during that period and now am sitting at a 3.125% 30-year mortgage.
Interestingly enough, the fact that my and most of you readers have a sub-4 % mortgage doesn’t make it free in and of itself. You see having a 3% mortgage is clearly fantastic, however that is half the battle. To truly be “free” you have to consider the opportunity cost of your money elsewhere. When most of you got these mortgages interest rates were virtually 0% and thus your alternative options for your funds were also extraordinarily low. For instance, my high-yield savings account was paying sub 1% in that environment.
High Yield Savings Accounts
Fast forward to today, let’s see a show of hands for those reading this who have their cash savings sitting in a high-yield savings account, such as Capital One, Ally, or my personal favorite Liveoak Bank? Quick tip, if you aren’t utilizing these types of accounts for your cash you may be missing the proverbial boat. Today my cash savings account is paying approx. 4.5%.
Hopefully, you can start to see where I am going here by now. Many people have this massive urge to aggressively pay down their mortgage quickly. Trust me I get it. However, if you do so (which is fine) it is worth knowing that you may be missing out on this extremely unique free money environment. Simple arithmetic for you all. If you have a $100,000 mortgage at 3%, and $100,000 in cash savings at 4% you are earning more on your money than you are being charged interest on your debt, aka free money.
Thus, if you have this massive urge to overpay your mortgage try a different tact. Take those dollars and start squirreling them away in a HY savings account as mentioned above. Even if paying off your mortgage is a top priority continue to put these dollars to cash savings. When interest rates on these savings accounts dip below your mortgage rate, then and only then empty that account and throw it all at your mortgage if you are so inclined.
It is an extraordinarily rare environment to have your FDIC cash sitting there earning more than your fixed debts. Heck, you could even squeeze out a few extra fractional percentage points if you are willing to tie up these funds in a bank CD for a year or so rather than a HY savings account. In any event, despite the massive urge to want to aggressively overpay your mortgage, it is really worth noting that the arbitrage on your cash savings in most cases doesn’t make it worth it.
Disclaimer: There are still situations and still people who will overpay their mortgage, and that is OK. This blog wasn’t meant to make you feel silly, but rather to point out this very unique environment we have and a way to earn some free money.
We are here if there are any questions and as always stay wealthy, healthy, and happy.
