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Prime Rate

also known as the Fed, National, U.S. and WSJ Prime Rate

Monday, May 08, 2006

Here's An Interesting Argument: Paying Down Your Mortgage with Extra Payments May Be Bad for Your Financial Wellbeing

In you're a homeowner, then at some point in the past, you've probably been advised to make extra principal payments on your mortgage so that you reduce the total interest that you'll pay on your loan in the long term. Makes sense, right?

But lately I've been reading--from varied sources--of financial experts advising clients to forget about the old "pay down your mortgage" adage, and instead focus on liquidity. After all, the argument goes, making extra mortgage payments translates to less cash in your bank account, cash that could be used to make wise and safe investments, or to pay down credit card debts that have high interest rates associated with them. And let's not forget about the all important rainy-day cash that we all should have tucked away in case of emergencies.

With all the mortgage refinancing going on these days, I think it's safe to conclude that many folks...well...get it.

For more, check out the today's press release snippet featuring comments by Certified Mortgage Planning Specialist Robert D. Ashby:

"Paying additional principal toward your mortgage, or even getting a bi-weekly mortgage program, could be detrimental to your financial health.

That’s right. In most cases, instead of paying extra principal, there may be a better way to pay that mortgage off and experience financial freedom faster. 'The truth is, you may never want to pay off your mortgage,' says Robert D. Ashby, President of Solid Rock Mortgage Corporation.

Mr. Ashby continues, 'Why? Your home’s equity is not a safe investment. Equity has no rate of return and has no liquidity. You cannot access your equity without qualifying for a mortgage of some kind, which requires you to pay fees, and borrow your equity on the banks’ terms, plus you must prove you can qualify.' This is especially true in cases of job loss or some other financial crisis.

Additionally, by taking the money normally put toward extra principal and investing them in other safe investment vehicles, families can increase their liquidity, and realistically be able to pay off their mortgages faster. Families may even want to take out a new loan or refinance their current loan to increase safety, liquidity, and rate of return.

The majority of Americans carry huge credit card balances with high interest rates and most do not have enough money in savings to tide them over in a financial emergency. For this reason, refinancing or taking out a new loan may be even more beneficial for them by increasing their cash flow, which can then be invested to create a college savings plan, vacation plan, or even increase their retirement plan.

There are several strategies for the homeowner to consider that can allow them to experience financial freedom sooner than trying to pay off their mortgage as quickly as possible. Obviously, these strategies will not be advisable to everyone, so seeking the guidance of a Certified Mortgage Planning Specialist to find out which strategy is the best is a wise decision."



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