Reevaluating Your Financial Strategy
Hey Kristin, When my partner and I bought our condo during the peak of the pandemic, we decided to focus on paying off our mortgage principle with our extra funds each month. With interest rates on the rise, we're wondering if this is still the best approach. Would it be more advantageous to contribute to our high-yield savings account or consider investing instead? Our mortgage interest rate is 2.98%. Thanks, A Savvy Saver Turned First-Time Homeowner
Financial Advice for New Homebuyers
Congrats on purchasing your new home and securing such a low interest rate! With current mortgage rates at around 6.7%, you're potentially saving a significant amount of money compared to today's market. The decision between paying down your mortgage or saving boils down to crunching the numbers. While some high-yield savings accounts offer interest rates above 3%, surpassing your mortgage interest, it's essential to consider potential increases as the Fed adjusts rates. In theory, you could earn more by saving rather than paying down your mortgage, but the amount you plan to save is crucial. Conduct a thorough analysis to determine whether your savings outweigh the interest paid on your home loan each month or year.
If you're keen on maximizing wealth beyond paying off your loan early, have you thought about investing? Despite market volatility, investing could be a lucrative long-term strategy, especially if you're young and have a lengthy investment horizon. Capitalize on lower asset prices in the current market to potentially realize substantial returns down the line. While short-term losses are possible, a bullish market may yield over 300% total returns—surpassing a high-yield savings account's benefits.
Building an emergency fund equivalent to three to six months' expenses is advisable, with a preference for a six-month buffer. If you're falling short on emergency savings, prioritize bolstering this fund. Consider redirecting a portion of your surplus savings towards this essential financial safety net. While temporarily easing up on accelerated mortgage payments may prolong your loan term and accrue more interest, supplementing your mortgage later with accrued savings is a viable option. Furthermore, consider reallocating your current savings to a high-yield account for enhanced interest gains.
Hope this guidance helps navigate your financial journey effectively. -Kristin If you need more financial advice, submit your inquiries anonymously for potential inclusion in my upcoming columns.
