Friday, December 16, 2005

Pay Debt or Invest

I am not talking about the so called "bad" debts here, I am talking about "good" debt. For me, this includes my mortgage and student loans.

A question that I have been thinking about a lot since we moved into our new house was whether or not to pay extra on my mortgage each month or to save the extra money and invest it. My 30-year fixed mortgage interest rate is 4.75% and I am currently paying an extra $200 a month so that it equals an extra payment at the end of the year. DD sent me the following article the other day on this very subject. Unfortunately, their basic answer is that it depends.

The second part of this problem is with my student loans. I think that my interst rate is ~3.5% and I have not been paying any extra per month on these. I am currently paying about $350 a month on my 2 student loans, so it will be really nice when I am done paying that off.

Would it benefit me at all to take some money from my emergency fund or the next chunk of my investing money and put it towards either of these loans or should I just keep paying them as I am? Any other thoughts would be great.


Anonymous personal finance advice said...

With the rates so low on both of those loans, I would personally not pay them off early? Why? Because interest rates are still likely to rise a bit more and you can earn more money by keeping the extra payments in a savings account than you can by paying them off early.

You can get a better rate from online banks than you're currently paying on student loans (HSBC is paying 4.25% with a $25 opening bonus). While your house loan is a bit higher, you do get tax incentives that lower that rate slightly plus if you look around you can find CDs paying higher. I also don't think it will be too long before online banks will reach the 4.75% mark

My strategy would be as follows. I would set that $200 aside as pure savings - not against your mortgage or the loans and reap the benefits of higher interest (and thus gaining the interest difference into your savings) Then if at some point you decide that you want to pay them off, you can in one big chunk at any time desired if it makes sense.

12/23/2005 7:16 PM  
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