Are You Earning More in Your Savings Than What You're Paying on Your Mortgage?
- You'll often hear that paying off your mortgage early can save you money.
- These days, that may not actually be the case.
- Many banks are offering generous interest rates on savings accounts, some topping 3%.
If the answer is yes, you're in a great spot.
You'll often hear that it pays to pump extra money into your mortgage if you're able to do so. That way, you can pay off your home early and benefit from interest-related savings.
But these days, some mortgage borrowers may be earning more interest on the money they have in savings than the interest they're paying on their home loans. And if that's the boat you're in, you may want to stick to your regular payment schedule after all.
Is your mortgage interest rate lower than your savings account rate?
In mid-2020, mortgage rates began dropping to record lows. That pushed a lot of homeowners to refinance their mortgages and lock in lower rates. In fact, it was common to sign a 30-year fixed mortgage at under 3%. And if you were willing to take on a 15-year loan, you may have locked one in at under or around 2.5%.
Of course, back then, savings account interest rates were largely abysmal; a lot of banks weren't even paying close to 1% interest on money in savings or a certificate of deposit. But these days, things look very different.
The Federal Reserve has implemented a series of aggressive interest rate hikes in an effort to slow the pace of inflation and give consumers some much-needed relief. That's driven up savings account and CD rates across the board, to the point where many banks are now paying 3% or more on these products.
Meanwhile, mortgage rates today aren't nearly as low as they were back in 2020 or 2021. In fact, if you're signing a 30-year mortgage, there's a good chance you'll end up paying somewhere in the ballpark of 7%.
But if you have a low interest rate on your mortgage -- either because you first signed that loan or refinanced it in 2020 or 2021 when rates were far more competitive -- then you may be at a point where your savings account interest rate is higher than the interest rate you're being charged on your mortgage. And if that's the case, it really doesn't make sense to pay off your mortgage ahead of schedule -- especially if that's a hardship right now.
Will mortgage rates and savings account rates remain high?
The way borrowing rates and savings account rates trend in the coming months will hinge largely on the turn inflation takes. If it remains high, the Fed will likely respond with even more rate hikes. That could lead to higher financing costs for assets like homes and vehicles, but it could lead to banks paying more generously.
If inflation levels start to taper off, the Fed might relax its interest rate policies. Once that happens, borrowing rates could start to come down, and savings account rates could follow suit.
Ultimately, it's too soon to predict anything with certainty. The U.S. job market is still strong, and by virtue of that, we're unlikely to see a drastic near-term reduction in consumer spending. And until that happens, inflation is unlikely to cool.
Things could change in the course of 2023. But we'll need to sit back and see how things play out.
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