Paying down that mortgage...

Recently, a question was asked: "With rates for loans so low, would it be good to take out a loan to pay down my mortage?"

Rates are incredibly low right now. The Federal Reserve has chosen to walk the fine line of keeping interest rates low in order to spur economic growth, while allowing inflation to creep up. Most economists will argue that the job of a Federal Reserve is to keep inflation in check and only use stimulative interest rates to boost the economy if inflation is simultaneously contained. One need only look at the late 70's to see what happens when inflation runs rampant.

Given all of this, rates may be the lowest they'll be for a few years. Eventually the Fed will begin to raise rates, either because the economy will begin to steadily grow again or because inflation will begin to rise at an uncomfortable rate. Either way, this may be a good time to refinance, if and only if the cost to refinance doesn't outweigh the savings you'll gain from refinancing. Always remember to do long term calculations. Finance isn't a short term game.

Lastly, I might suggest other ways to quickly pay off a mortgage. First, pay twice a month instead of once a month. If you pay your monthly mortgage payment at about two week intervals you can shed up to eight years off of your mortgage. Also, if you make one extra payment a year against the principal, you can take years off of your mortgage as well. See: http://www.bankrate.com/brm/news/mtg/20010920a.asp

Keep in mind that this is a two-edged sword. Pouring more money into your mortgage denies you the ability to invest that money elsewhere, although paying off your mortgage early will ultimately allow you excess free cash flow in later years. This money of course will not have the time to grow and compound as money invested in earlier years. The only way to know for sure what you should do is to sit down and do a personal financial plan and calculate what is best for your individual situation.

I'll address some other topics brought up in later posts, such as: interest rates, inflation and Federal Reserve Policy. Until then!