Q: To settle an argument (with my brother-in-law), let’s assume I have some money to invest. Is it still a good idea, in today’s difficult real estate market, to send in extra money to pay off my mortgage quicker? – J.
A: First off, no particular financial move is good for everyone. The answer depends on many factors: the stability of your job, whether you have emergency savings stashed away, and whether you’re paying high interest on credit card borrowing. But in general, if you have, for instance, a 5 percent mortgage, then every extra dollar you send in to reduce the principal debt saves you five cents a year from then on. That’s a 5 percent return, no-risk, guaranteed, which is terrific investment income these days compared to less than 1 percent on bank savings accounts.
You wouldn’t want to tie up extra money in your house, though, until you had set aside enough cash to cover several months’ possible emergencies. And if you’re paying high interest on credit card borrowing, you’ll get an even better return by applying your extra cash to reducing that debt. Only problem is, you must then resist the temptation to run your credit card balance back up again.
Edith Lank will respond personally to any question sent to www.askedith.com.