For most first-time homeowners, private mortgage insurance (PMI) is a necessary evil. It really doesn’t do a thing for you except allow you to own a home without putting down 20% of the cost up-front. The insurance is actually for the lender in case you bail on them.
Being the frugal fella you are, you have spare cash each month and you need to decide what to do with it. You probably have several options: pay down the mortgage, pay down student loans, invest in a retirement account, pay off credit card debt (credit card debt? but you’re a frugal fella, right?), or put it under a mattress. Whether you’re earning interest or paying interest, these can still be compared to find the most qualified suitor for your cash. Let’s take a look at some numbers, however accurate they may be, for each of these sinkholes:
- Pay down the mortgage: 5% (mortgage interest rate)
- Pay down student loans: 4% (student loan interest rate)
- Invest in a retirement account: 9% (rate of return)
- Pay off credit card debt: 12% (credit card interest rate)
- Put it under a mattress: 0% (rate of return)
Now, if you subscribe to the idea that you should put your extra cash in the one with the highest rate, this would lead you to believe you should pay down the credit card. Most people would stop there. Continue reading »