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May 30, 2007

Saving versus paying off the mortgage

If you've accumulated some savings, would it be better to pay down your mortgage or invest the funds? N.C. State University economist Mike Walden says there's a simple answer.

"I have this question put to me a lot. I hear this question on financial shows. And there really is an easy answer, and the answer is simply put your money where the interest rate is highest," says Dr. Walden, a specialist with North Carolina Cooperative Extension.

"Now what does that mean in this example? Well, it means look at the interest rate on your mortgage, then look at the interest rate that you could earn in whatever investment you are considering, and put your money wherever the interest rate is higher.

"That is to say that if, for example, you have an 8 percent mortgage, an 8 percent interest rate, and let's say your best investment is to earn 6 percent, you'd actually be better off taking any spare cash and paying down or totally paying off that 8 percent mortgage," he explains. "It's like earning 8 percent.

"Conversely if the numbers are flipped -- you can earn more on your investments than you can on your mortgage -- then keep your mortgage and go ahead and invest," he adds.

"Now there are some technical things here in terms of tax deductions for mortgages as well as interest on investments. So if you want to get real precise you have to consult a financial expert to do that," Walden concludes. "But the general rule of thumb is simply look at where the interest rate is higher, and that's where you want to put your money."

Posted by deeshore at May 30, 2007 08:00 AM