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When Cash is Paying More Than Your Mortgage!
There is an extremely unique set of financial circumstances going on right now. One of the things I find most interesting is the inverted relationship between your cash accounts and your mortgage. If you have taken any advice I’ve given over the past few years there are likely two things that have happened with your financial life.
- You have refinanced your mortgage when rates were insanely low.
- Your extra cash on hand is sitting in an FDIC high-yield bank account.
I personally know my cash account is paying close to 4% APR and my primary mortgage is locked in at 3.125%. I’m not sure in my lifetime we’ve seen such an environment where literally your savings accounts are yielding a better return than your 30-year mortgage. This was the beauty of taking advantage of what the Fed provided us with low-interest rates a few years back. It allowed many of us to put ourselves in a great financial position, by having long-term debt locked in historically low rates.
On the other hand, we have been living through savings accounts paying a laughable amount over the past few decades. With the constant involvement of the Fed, as it pertains to interest rates, we have been mostly in a 0 interest rate environment. Now, however, one of the plus sides of what the Fed is doing with interest rates to combat inflation is banks are paying very attractive interest rates on FDIC-insured cash.
Guess the question is so what planning opportunities are there with this current “unique” set of circumstances? Boy, am I glad you asked! The first planning opportunity is the easy and obvious one. If your free cash on hand is not at a 3.5% rate or better then highly consider utilizing an online high-yield account. As they say, it is free money!
The next planning consideration worth mentioning is taking advantage of that arbitrage between your savings accounts and your mortgage. You see, many people are inclined to get out of debt as quickly as possible. In the past, clients constantly will ask should I invest this bonus in the markets, or pay down my mortgage. It generally leads to a nice planning discussion. Inevitably, the debate is: do you want the sure thing of knowing you’ve paid down more (albeit low) interest debt, or the variability of investing in what is likely to have better returns although comes with an element of uncertainty?
Mathematically speaking, in most cases putting substantial resources into overpaying a low-interest-rate mortgage over more opportunistic investment options doesn’t make sense. However, when it comes to the psychological or emotional side of things it may feel better for a more risk-averse individual to still overpay their low-interest mortgage. Sometimes it is due to peace of mind, sometimes it is a preference, and sometimes it simply de-risks one’s financial situation.
The interesting thing about today’s environment is there appears to be option 3. Option 3 is to take that cash you would otherwise use to pay down the mortgage and put it in a high-yielding savings account. Allocate it there under the notion you can always access it to throw at your mortgage in the future. In the meantime, you will enjoy a higher ROR on those dollars than the commensurate savings (which likely are deductible if you itemize) you would otherwise have by paying down a mortgage.
If you want to take this thought an extra step further, you could even go as far as taking the interest gained every month, quarter, or annually, and pulling that portion out of your savings account to throw at your mortgage. This way you are overpaying a little and utilizing higher-earning funds to sweep the earnings and pay down lower-paying debt. The less frequently you do this in theory the better, but it certainly provides a way for you to have your cake and eat it too because let’s be frank who wants cake they can’t eat?
What will you do?
I know this isn’t a one size fits all strategy, and neither is anything when it comes to finances, but I thought I’d get this thought out there while this unique set of circumstances exists. The good news is as always you have options as to what makes the most sense for you personally, and of course, we are here to help guide you to make the right decision for you.
Stay wealthy, healthy, and happy.
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