Last year the Federal Reserve raised interest rates a historic 11 times in a cycle curbed to tame high inflation. In fact, benchmark rates set by the Fed are at their highest level since 2002, only 2 years after I started my career in financial services. Today the average 30-year mortgage is right around 7% and the average 1 year CD rate today is 1.86% but many banks are now offering 1 year CD's in the upper 4 to 5% or more.
Sometimes I get the question, should I cash in my investment to pay off my mortgage? Well, taxes aside, the equation is relatively simple. Are you earning more on your investments that what the cost of the loan's interest rate is? In other words, let's say you could invest into a CD earning 5% or pay off your mortgage which is costing you 3% (assuming you locked in several years ago when rates were at 20-year lows)? Normally I would recommend investing, instead of paying down debt in that case. To make it even easier to understand, let's say the bank lent you money at 0% interest for 30 years. Why in the world would you give it back to them early, when you could be using it and earning interest on it. That's the way the banks make money. They borrow your money when you buy a CD and then turn around and loan it out to the guy behind you in line at a higher interest rate and get to keep the "spread" (difference between what they are earning on the loan and what they are paying you on the CD interest). If you are thinking about paying down debt or investing, give us a call at 386-299-2893. We will give you constructive, honest advice.