Debt is the new thrift?

[pinkytoe]

I found this article by Scott Burns eye-opening. Perhaps it is time to either pay off the mortgage with our low/no interest savings account or refinance. Thoughts?
http://www.dallasnews.com/business/columnists/scott-burns/20130105-coping-with-the-zero-interest-rate-policy.ece

[SteveinMN]

IMHO Burns is right on in most of his advice -- though much of it is the old pay-off-your-credit-cards-so-interest-doesn't-cost-you-up-the-youknowwhat. I wish he'd spent a little more time on maintaining a cash cushion, however. It's one thing to clear up a mortgage or car loan or CC bill, but if you have done so by chewing away at an emergency fund (which I didn't see mentioned at all in the article), you're skating on thinner ice. It would be nice to earn some interest on EF money, but not earning any to speak of is no good reason to put the money elsewhere (though we've discussed in other threads here better-interest vehicles for that money).

[ToomuchStuff]

I will need to reread it again, after getting some sleep (thinking I missed something). When I read about the refinancing the mortgage, my brain went wonkers. I don't have one, but the ones that sprang to mind, that do this, just keep getting in the debt cycle. It seems to me, that even having money at 0% interest, is better then always owing money at some ridiculous percent.:confused:

[catherine]

Yes, interesting article. I agree with the refinance, but DON'T agree with extending the life of the mortgage. Why is that a GOOD strategy?? If you keep it at 10- or 15-years, you can get a lower interest rate, and you're still able to manage the cash flow (assuming you haven't had trouble up to that point). I'm actually doing this now--refinancing the house which has 22 years left on it, but I opted for a 15 year refi. I still increase my cash flow by $400 AND I've cut 7 years off the life of the loan.

I do like the part about the watching spending..


Spending smart is better than saving dumb. Low yields also make good buying decisions immensely more valuable. If you take a close look at every dime you spend, you’re likely to find expenses that can be cut. Do you really need or want all the cable TV channels you get? Have you minimized your bank account expenses? Have you thought about using the public library rather than buying books? Could you buy more, at lower prices, through Amazon?

If you save only $100 a month from paying closer attention to your spending and you’re in the 15 percent tax bracket, you eliminate the need to earn $117.65 from your savings, or $1,411.76 a year. You’d need $141,176 in a one-year CD at 1 percent to produce the same interest income. Even in the long-lost wonder days of 5 percent CD yields, you would have needed more than $28,000 in a CD to have an effect equal to $100 of smarter spending.

I love really holding a mirror up to the long-term consequences of what one might consider a one-time purchase. That does make sense to me.

[SteveinMN]

I did breeze over the part about refinancing to a farther end date. Depending on the situation, though, that can make sense. I got the feeling Burns was speaking primarily to people who were living paycheck-to-paycheck and pretty close to the bone. In their cases, if they can get a few hundred dollars a month breathing room through a refinanced mortgage, 1) they should be able to get a pretty low rate now (certainly lower than CCs), and once they pay off the higher-APR debt, 2) they can always pay extra on the new mortgage (cutting its term). Maybe not a win-win, but probably further ahead than doing nothing.

[HumboldtGurl]

"After that, refinance your car."

Seriously? Wow how dumb, IMHO. The goal should be to pay off the car loan quickly, not drag it out. If you can't afford the payments as is, you can't afford the car and need to get rid of it. Dumb. Dumb. Dumb.

[jennipurrr]

I see how refinancing with a longer end date could help people who are barely making it. Like if they have a secure pension in retirement but they can't physically keep working and haven't planned ahead. With such low interest rates it is mainly principal you pay off early. I don't think its optimal strategy though.

Like catherine, I recently refinanced two rental properties on slightly shorter terms and still ended up with slightly lower payments. Best of both worlds! Now I am five years ahead of where I was and have better cashflow.

[RosieTR]

I think the strategies only work if you got yourself in a hole to begin with. Otherwise, the math still doesn't work out. For example, we have been saving to buy a new(er) vehicle. Even earning <1% on the savings, it still beats *paying* even 2%. Mortgages might be exception, if you can shorten the length like some mentioned or if you're relatively early on (like got a 6% loan less than a decade ago). This assumes you can get approval for refinancing because you're not upside-down or something.