I was talking to someone the other day who said to me: But why would I bother paying down my mortgage now? My interest rate is at like.. 3% and I could make more investing it in the stock market.
1. You’re assuming you’ll make more on the stock market which is not entirely true
Unless you have a crystal ball, you aren’t ever going to know if you make more on the stock market.
Yes, in the LONG-TERM you will make more money in the stock market than saving it away in a 1.3% piddly high-interest savings account, but for the short-term, 5-10 years, the stock market could dip again.
2. You are paying 3% interest…… NOW
..but when interest rates increase to 4%.. then 5%.. then 6%… then 7%… perhaps all the way up to the average 11.45% – 12.71% it has historically been in the past, maybe you’re going to wish you cleared that debt today.
3. But rates are SO CHEAP! I have to get in NOW to lock them down.
Not really. If you spend less money overall on the debt, it is worth it to pay more in interest on less.
Take for instance if you borrow $10,000 and pay 3%, you’re paying about $300 a year.
If you wait, save up, and borrow $8000 instead because prices have gone down and people are more desperate to sell, you will pay 5% which means you’re paying $400 a year or $100 more, but you’ll have saved $2000 in the process.
Think about this for a home. Waiting for prices to go down, and paying $50,000 less, is $50,000 less of debt you will have, which will outweigh any percentage increase in interest rates you may have.
When the times are good, clear your debt as quickly as possible to prepare for the bad times.
Now is the BEST time to clear your debts.
Clear your mortgage while it’s still at its deliciously low interest rate, and get rid of it while you still can, and while MORE of your money goes towards the principal rather than the interest rate.
Don’t wait until the rates go up before realizing you should have done it sooner.
Don’t take on more debt to buy a new car, a new toy, a pool, or any other kind of depreciating asset EVEN THOUGH the interest rates are low and very enticing.
If you want something (usually unnecessary, I’m guessing) and can’t afford it save until you have enough to buy it in full, and then CHOOSE to buy it on credit and pay 0% interest or whatever it is that they’re offering you.
Don’t get screwed on the upswing and regret it.
Debt is never a way of life and never a good thing to have unless you are in control and know what you’re doing.
Who are those in-control people you say?
They are people who have plenty of cash in their bank accounts, and are borrowing money at super low interest rates because they KNOW they can leverage that money to make more by investing it, but if push comes to shove, they have the ability to liquidate what they have to clear that loan if things get nasty.
That’s who is in control of debt and can use it wisely.
UPDATE: Looks like Garth had the same brainwave I did when I was walking around outside looking at For Sale signs on homes coming up with this post on a whim, because he wrote a perfect piece to why you should rent instead of buy.
He just did a lot better than I did.