We’re in an interesting time, financially speaking, with a unique set of financial circumstances. There’s likely an inverse relationship between your cash accounts and your mortgage. A decent, high-yield savings account is somewhere around 4% APR, and if you were able to lock in a low interest rate years ago, you may have a rate as low as 3.125% or somewhere in there. It’s an unusual environment where savings accounts are yielding a better return than a 30-year mortgage. This was the beauty of those low interest rates a few years ago, it allowed many to take advantage and lock in that debt at historically low rates.
While mortgage rates were historically low, we also have seen savings accounts with almost comical rates of returns over the years. The current higher interest rates is only a plus side to what the Federal Reserve is doing to combat inflation, as they’re raising rates and banks are paying attractive interest rates on FDIC-insured cash.
Using This Unusual Environment To Your Advantage
So how can you use these unusual circumstances to your advantage? First and foremost, if your cash isn’t earning you at least 3.5%, find a high-yield account that will earn you that or more and make the switch.
The next thing to consider is the juxtaposition between your savings and your mortgage. Many people are trying to get out of debt as quickly as they can, including mortgage debt. While paying down a low interest debt may feel better for a risk averse individual, there’s usually more upside and better investment potential by putting that money into an investment.
There’s an interesting work around here for those that are risk averse – you can take the money that you would spend to pay down your mortgage, and put it into a high yield savings account instead. Placing it there, with the understanding that at any time you can take it out and put it toward your mortgage, will still earn you more in interest than you’d be getting by paying down your mortgage (assuming that your mortgage is a low interest rate), and you’ll still have the funds liquid to use to pay down your mortgage if you like.
Go a step further and just
just
take the interest that you’re earning on that money in that high yield savings account, and use just that portion to pay down your mortgage. This way you’re still overpaying your mortgage and utilizing the higher earning funds to sweep the earnings and pay down the lower paying debt.
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