I have a sizable mortgage with a 4.65% APR loan. I was not planning on paying it off early, as I generally think my other investments can beat that 4.65%. They certainly have been thus far.
However, I was recently helping my mother look for a good place to park some of her cash (short term low risk investment). Vanguard's Money Market Fund (~2.5%) was looking pretty good. Then another idea came to me. What if I took the cash from my mom, paid down my mortgage that amount, and gave her 4% return. She gets a nice safe investment with 4% return, and I shave off .65% from my loan APR. Win/Win.
In theory, I think this works. But has anyone ever done this? Pitfalls? Advice?
Thanks!
I've actually just done exactly that. I paid off my mortgage with cash from my mom, calculated how much that saves me vs. increasing my mortgage payments, and she'll get the difference and a bit more. She's really wary of things like stocks and was only getting sub-1% interests in saving accounts, that way she gets a bit more.
Things to make sure that works:
- be serious about paying back. Everything I can save every month, I use to reimburse.
- it's a rather short-term loan (2 years). She is sure to have all the money back when it's due, because at that time I will get a bonus from work which will allow me to pay back whatever I still owe, even if for some reason I've missed a payment.
- if she ever needs cash back before the term I can always take from my savings to reimburse her (though it would be best if that happens at a market high :)
The other posters are right, it never hurts to see if you can get a better rate, but personally I feel better knowing I no longer owe the bank.