Posted on June 12th, 2013
**Today’s guest post is contributed by Catey.**
For many years, homeowners have likely heard the same financial advice: Pay down a mortgage as quickly as possible. But these days, many financial advisers are singing a different tune, telling clients that in some cases it makes sense not to pay off their mortgages early. After all, mortgage rates are hovering near historic lows at around 3.8 percent, and homeowners can get a tax deduction for having a mortgage.
Here are six reasons savvy homeowners choose not to pay off their mortgages early.
1. They Have Higher-Interest Debts
Homeowners who have credit card or other high-interest debt often should prioritize paying off that debt before paying off a lower-interest mortgage. So, if a homeowner has a mortgage with a 4 percent interest rate and a credit card and/or a loan with an interest rate that’s more than 4 percent (most credit cards have rates of at least 11 percent), the homeowner should pay down the credit card or loan as quickly as possible and pay just the minimum on the mortgage each month – at least until that higher-interest debt is paid off.
2. They Don’t Have an Emergency Fund
Most financial advisers recommend that people have an emergency fund — at least six months’ worth of living expenses in the bank — so that if something happens such as a job loss or accident, they won’t have to put that expense on a high-interest credit card or take out a loan. If homeowners don’t have any “emergency” savings, it may make financial sense to pay just the monthly minimum on their mortgages until they’ve built up a sufficient emergency fund.
3. They Are Not Taking Advantage of an Employer’s 401(k) Match
If an employer matches a homeowner’s 401(k) contributions — employers who offer a match tend to put in 50 percent of every dollar an employee puts in up to about 6 percent — the employee should contribute at least up to what the employer matches before racing to pay down a mortgage. Because the 401(k) match is literally free money, it makes better financial sense to take advantage of the unbeatable opportunity. An added bonus is that a 401(k) offers a tax advantage. Employees put in the money tax-free, and though they must pay taxes on it when it’s withdrawn, they are likely to be in a lower tax bracket in retirement than they are now.
4. They Think They Can Get Better Returns Elsewhere
Homeowners who pay more on their mortgages than the minimum owed are using cash they could be using for other purposes, such as buying other investments that might offer better returns.
5. They Seek Diversification
Financial advisers often stress the importance of diversification. Investors should have their money in a variety of different investments such as stocks, bonds and real estate so that if any one type of investment drops in value, at least the investor has other investments to rely on. In other words, people shouldn’t put all their (investment) eggs in one basket. When it comes to their mortgages, many homeowners only pay the minimum so that they will have the money to invest in other areas as well.
6. They Want Liquidity
Homeowners who pay off their mortgages as quickly as possible can tie up large chunks of their money in their homes. Because real estate is not a very liquid investment (it typically takes a lot of time to sell a home and get out the cash put into it), this move can tie up homeowners’ cash for months. Thus, homeowners who seek more liquidity may want to put that extra cash elsewhere.
To be sure, there are myriad reasons to pay down a mortgage early. If homeowners have plenty of savings and investments and no other debts, there’s little reason to pay mortgage interest for longer than needed. Plus, having a home paid off gives many people significant peace of mind. Thus, homeowners considering whether to pay down a mortgage early should talk to their financial advisers.
Catey Hill is a writer and editor whose work has appeared in/on The Wall Street Journal, SmartMoney, Worth, Seventeen, Forbes.com, MarketWatch.com, the New York Daily News, and dozens of other publications and websites. She is also the author of “Shoo, Jimmy Choo! The Modern Girl’s Guide to Spending Less and Saving More” (Sterling, 2010). You can read more at CateyHill.com.
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Posted on May 29th, 2013
**Today’s guest post is contributed by Lauren.**
I am only twenty-six, and yet I have moved houses, apartments, dorms, and cities a total of seventeen times. Yes, seventeen. My mother used to chastise me for my “restless nature” because I never stayed in one place for long, but having to move around so much kept me ready for change. It also guaranteed I never accumulated too much, since I usually had to part with one or two of my favorite things each time I moved. Still, no matter how much “stuff” you do or don’t have, moving is an expensive endeavor. Here are just a few things I’ve learned about saving money while moving.
Use Household Items as a Buffer
No need to pay for pricey bubble wrap or special “packing” paper. Just use what you own! Sheet sets, Gym T-shirts, towels, and unused garbage/plastic shopping bags can all gain a second life as the packing buffers you stuff between breakable items like dishes, picture frames, and vases. Two birds, one stone — especially since you’ll have to find a way to pack those items anyway. Oh, and that trick with old newspaper? Don’t do it, it’ll leave an inky mess all over your belongings.
Don’t Pay for Boxes
I’m almost positive there are already enough boxes in existence on earth for no one to ever have to pay for them ever again. Just don’t do it! If you know a move is coming up, don’t be lazy and wait until the last minute– get out there and scavenge ahead of time.
When I lived in New York City, there were always empty boxes out on the curb. If the thought of using those boxes gives you the heebie-jeebies, you can ask any retailer for some of their old boxes in the back. I have gotten boxes from CVS, the local grocery store, and even clothing stores like Charlotte Russe. They won’t cost you anything, except maybe a few odd looks from store clerks who don’t understand frugality.
Do Your Research
Just as I stated above, you’ll need to plan ahead for your move if you want to save money, and I’m not just talking about boxes. Doing plenty of leg-work beforehand can save you hundreds of dollars since you’ll be able to ascertain what is going to be cheapest for you and your family. Should you rent a U-Haul? Ship your furniture? Sell it all and start fresh in your new pad?
The answers to the above questions can be answered with even more questions: 1) How much stuff are you going to have to move? If it is just a room or two, shipping might be a cheaper (and easier!) option than a truck rental. 2) How expensive is your furniture? If it is an expensive piece or an heirloom, it might be worth it to you to pay extra to keep it around. If your entire apartment is furnished by Ikea, however, the furniture isn’t worth the truck it’s going to rattle in as you bounce along the interstate.
Budget for the “Unmentionables”
There are some items that get left behind in every move because, quite frankly, it’s a bit gross to transport them. Budgeting for those replacement items will keep your finances in check during the costly transition period between home and another. I’m talking about items like the shower curtain liner, the toilet bowl brush, the kitchen trash can, and condiments that need to be kept refrigerated and won’t make a long journey.
Hold on to your cleaning supplies
Somehow, because these items are the last thing I use in an apartment, they are the FIRST thing I forget to pack during a move. And yet, when you move into a new place, the first thing you want to do is clean it. (I don’t know, maybe I’m just really OCD about cleaning.) Buying all the necessary cleaning supplies you need to start a household can get expensive, especially if you do it all in one fell swoop. This is why my suggestion to you is, hold on to your cleaning supplies for dear life. You never know when you’re going to need those baby wipes during your first few days in your new place.
If you use these 5 tips, you’ll be able to save a lot more money than most people do on their move. But while you’re at it, don’t forget that where you live has a big impact on your finances. If you’re thinking of buying a home, make sure to calculate whether you can afford it. And if you’re currently renting, don’t forget that you can often negotiate your rent. So stay focused and either way – enjoy making a low-cost (and hopefully low-stress) move!
Lauren Bowling is a personal finance writer at ReadyForZero, a website that helps people get out of debt faster on their own. She enjoys writing about all things finance, relationships, and self-esteem.
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