YOUR MONEY CHRIS FARRELL
Q We bought a house in August with a down payment of 20 percent and a 30-year, $300,000 mortgage fixed at 6.125 percent. We are making an extra monthly payment per year (we are paying half the monthly amount every two weeks), so the payoff would be in 24.5 years. We just paid off an auto loan and have no other debts. We still have some extra cash available ($10,000 to $15,000) besides bank reserves for three to four months of mortgage payments. We wonder if it makes sense to use this cash to lower the mortgage principal. We are totally risk-averse, so the other option would be to put this money into a CD or buy bonds. Too conservative?
A There is nothing wrong with being risk-averse with your money, and I'm glad that you recognize that you are conservative about money. I've always liked this story for putting risk into perspective:
J.P. Morgan was the great 19th-century financier. The tale goes that a man was in a panic after putting all his money into the stock market. He wanted to be rich, but if the stock market crashed he was financially ruined. He couldn't sleep. One day, seeing the imposing figure of J.P. Morgan walk down Wall Street, he summoned up his courage, and asked the financier, "Mr. Morgan, I've invested all my money in the stock market and I can't sleep. I'm a wreck. What should I do?"
Morgan replied: "Sell down to the sleeping point."
Putting more money into your mortgage is one way to sleep well at night, and that's OK. Here's my caution: You're already accelerating your mortgage payments, and I'm wary when people take all their discretionary savings and sink it into their home. What about putting that extra cash into building up your emergency savings? In your case, I like your idea of putting the money into FDIC-insured certificates of deposit, an FDIC-insured online savings deposit and similarly conservative investments. Remember, cash is king during a recession.
Sure, you won't make much in interest, but it's a valuable safety net. The cash is also an "opportunity" fund. Good deals often emerge during a downturn, but the only people able to take advantage of them are those with savings. No debt but a fixed-rate mortgage and lots of savings: that's a terrific household balance sheet any time, but especially now. Congratulations.
Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to email@example.com, or to firstname.lastname@example.org. Put "Your Money" in the subject line.