Completely inappropriate question about financial matter

I'd tell you to pay it off, but since I could pay mine off and I don't, my advice is perfectly worthless.

(My reason is simple; I like having the money, and the mortgage doesn't stress me.)

Quote: rdw4potus

If you can refinance the entire mortgage at 4.25%, you should do that up to 80% Mortgage-to-value. Then you should take the resulting cash (if xxx-yyy>.8XXX) and buy the most aggressive portfolio of bonds that you can stomach. You can basically create a situation where the bond income pays the incremental mortgage payments plus a little extra.

Now, that's one of the things I was thinking ... but then, isn't the bond income taxable? Doesn't the fact that I'm in the top tax bracket imply that I need at least 5% bonds? And is there any offset to this by the fact that I no longer get the tax deduction on the interest?

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you're also protecting yourself if your home is destroyed by lions, tigers, or bears. If your insurer refused to pay for some reason, you could (kill your credit rating and) stick it to the bank.

Another thought I had. Owning the home outright gives me a lot of cash in one investment (I am investing in the appreciation of the property) with a lot of risk. The risks include every act of god for which I am not insured, together with being sued, together with insurance not paying their debts.

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Even if you do opt to pay off the mortgage, I HIGHLY recommend opening a HELOC at the best rate you can find. That way, if you want/need to tap your equity the line is there waiting for you. It'll give you access to your equity much faster than applying for a new mortgage at that time, and presumably you'd only want to tap the equity in an emergency/time-sensitive situation.

And surely a HELOC is available in the < 2% range.

The true cost of paying $3000 per month as a mortgage payment is about $1000. To see why ...

Of that $3000, $2400 is interest so that I get about $800 less in taxes. Also, $600 goes into equity in the house. Further, I have the outstanding mortgage balance to invest in high quality tax exempt state muni's giving me about a 3% return, for another $600/mo return. This leaves the true cost of the mortgage at about $1000 on a $3000 mortgage payment. Isn't that a good deal?

For that true cost of $1000 per month, I'm buying "insurance" on the mortgage amount, and pretty cheap rent.

Still thinking ... I need more convincing one way or the other.

Glad to see someone with the same thoughts ... it's complicated ...

--Dorothy

hi Dorothy, i agree with others here and pay off the mortgage. however, and sorry if i missed this if you mentioned it, but other factors like your age, if you have children (heirs), where you would like to see yourself in 5, 10, 20 years, etc. would play a part on what you decide.

yes, big decisions like this often are complicated. alot to weigh. at least it doesn't seem like you are pressured for time.

.

Quote: DorothyGale

Now, that's one of the things I was thinking ... but then, isn't the bond income taxable? Doesn't the fact that I'm in the top tax bracket imply that I need at least 5% bonds? And is there any offset to this by the fact that I no longer get the tax deduction on the interest?

Yes, the bond income is taxable. You'll need to pick higher-interest (but not outlandish) bonds to effectively lock in a return against a mortgage at 4.25% (effective rate of about 3% after the interest deduction). I'm not sure of your appetite for risk, but I've had good luck with organized peer-to-peer lending at a higher return. You could check out something like www.prosper.com as an alternative to the bonds.

Quote: DorothyGale

Another thought I had. Owning the home outright gives me a lot of cash in one investment (I am investing in the appreciation of the property) with a lot of risk. The risks include every act of god for which I am not insured, together with being sued, together with insurance not paying their debts.

To me, it makes a lot of sense to be mortgaged to the hilt with an equal amount of cash quietly earning whatever return your risk tolerance can bear in the background. You can always change your mind and pay off the mortgage, but for whatever time period that you enact this system, you come out ahead. Plus, you can turn the house back to the bank if the unthinkable happens. Just don't forget that doing so will limit your ability to do just about anything financially for several years. That's still probably preferable to taking a huge loss on the house in a disaster, but it's also a big consequence.

Quote: DorothyGale

And surely a HELOC is available in the < 2% range.

It'll depend on the amount of the line, and the position of the mortgage. 2% is about right for right now if it's in first position and less than 80% of the value of the home. But it's a variable rate product, so you'll be subject to changes in the prime rate (possibly the LIBOR depending on the product). There's nowhere to go but up on those rates, but with the HELOC version of the plan I think the idea is to have no balance on the loan so the effect would be minimal.

There is something mildly entertaining about watching people who gamble away money discussing financial strategy.

I have no particular "debt strategy". The only bill I carry is my mortgage and that damn monthly AMEX bill that gets 100% paid off each time. I don't purchase cars unless I can pay cash for them, which I recently did.

I will bet anything that a good 75% of people who post here are over-extended. Just like most Americans are with their credit cards leading the way, and cars they can't afford and shouldn't have coming in a close 2nd.

I tend to side with rdw4potus. It is not terrible to be in debt. There is good debt and bad debt. Credit card debt is bad debt. A nice low interest home loan is good debt. A loan on an income producing property or to start up a company is great debt. It is great to be free and clear of all debt but not necessary; it's as much a function of one's personality than anything else. You're a gambler, why not take the risk on the bonds or something similar? My father always called stocks "legalized gambling." It is, but you can get better returns. ;p
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rdw4potus, do you have any experience buying corporate bonds, e.g. Ford? What do you think of the risk/return for that?

Quote: JerryLogan

There is something mildly entertaining about watching people who gamble away money discussing financial strategy.

How can you gamble by discussing? It is only after making unwise decisions with negative expectation that gambling takes place. A loan, by definition, has negative expectation, but may NOT be unwise, hence the question.

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I have no particular "debt strategy". The only bill I carry is my mortgage and that damn monthly AMEX bill that gets 100% paid off each time. I don't purchase cars unless I can pay cash for them, which I recently did.

Obviously you have a debt strategy. To carry a mortgage and to pay AMEX bills (carry no CC debt). If you paid off your mortgage you may not have enough to pay your full AMEX debt each month and therefore pay a higher interest rate on a lesser amount of money. This is definitely a strategy.

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I will bet anything that a good 75% of people who post here are over-extended.

I will assume that "overextended" means having debts that exceed your total cash assets. If so, it sounds like you are overextended with your mortgage. I, for one, am not in the ballpark of overextended. My only debt is my mortgage, which I could walk into a bank and pay out in full today, with a lot of cash left over. The question on the table is "should I?"

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Just like most Americans are with their credit cards leading the way, and cars they can't afford and shouldn't have coming in a close 2nd.

I don't know what that has to do with this thread.

I am giving you the benefit of the doubt. So, say something smart!

--Dorothy

Quote: teddys

rdw4potus, do you have any experience buying corporate bonds, e.g. Ford? What do you think of the risk/return for that?

I tend to think that the market is much too conservative when they evaluate the risk of companies. The risk premium assigned to some company's bonds vastly outweighs the probability-weighted incremental risk (to a point. Junk is junk...). In the case of Ford, the company is profitable and becoming more stable every day. They're no more risky than most other heavy manufacturers, but their bonds have a higher yield.

If you were going to add the manufacturing sector back into your holdings, and you wanted to buy bonds, Ford would be a great pick. Institute for Supply Management industrial and manufacturing data shows a fairly robust recovery in that sector, so this might be a good time to make the move back into this segment.

Disclaimer: While I don't work in the manufacturing sector, most of my company's customers do. None of the info shared is privileged in any way. Also, I'm a B-school student and NOT an investment advisor, so please consider this opinion to be devised from somewhat of a sheltered position.

1. Gamble by discussing? Huh? + or -EV is gambling either way because most people do it over so short a period of time that it has nothing to do with ever getting to a point where it matters. Wise decisions or not, it is gambling. Those who claim playing only in +EV situations is not gambling, have a definite gambling problem.

2. I do not have a "debt" strategy because I am able to pay off my mortgage if I want to. A debt strategy comes into being only when an individual has to carry debt to live, and then has to have some kind of plan to pay off that debt....or else.

3. No, overextended has nothing to do with assets vs. debts. It has to do with spending more than you make. Lots of people have high-asset properties they can't sell right now and they have a high net worth, so they have to struggle paying their debts. But I am perplexed as to why you avoided the point I made about my belief that 75% of those who post here are overextended, and in fact, made an assumption that I am one of them after explaining my financial situation. It is that type of paranoia that leads me to believe you are not being honest.

4. Again, you are personally injured when I bring up credit card debt. I sense a hint of denial in that.

Quote: JerryLogan

... ignorant, baiting, self inflating, meaningless stuff ...

You have nothing valuable to add ... go troll some other thread.

--Dorothy