Boston Gal's Open Wallet

Yes, in general bonds are a better investment than cash. However when interest rates are heading higher, cash is a better investment than long term bonds are.

 

Yeah, I'm too cash-rich at the moment, also. I liquified a bunch of annuities I shouldn't be holding at my age, and haven't figured out what to do with the proceeds.

 

I think I may have the same problem.

Here's the situation my wife and I face: I've got a $250,000 home mortgage at 4.875% interest for 15 years (12 years left). Our home is worth about $800K. I've just looked at our portfolio and I found that we have close to $145,000 in various cash and cash-equivalent accounts (like HSBC, sweep accounts, money market, etc.) (I didn't realize it was that much in cash).

Do you think we should use some of our cash to pay down the mortgage? I figured at the most our cash was only earning 4.80% minus the effective tax rate of ~30%, or 3.36%. My mortgage interest rate is 4.875% minus the tax deduction which works out to be 3.41%.

If we prepay our mortgage but stay in our house, would we end up with no deductions left in a few years? Or buy a second home and then take the deductions then?

Any suggestions would be welcome.

 

Hi Seneschal,

I am not an expert nor am I familar with your future financial goals. However, I have never believed it wise to purchase property just for the tax deduction.

As for paying off your mortgage, that is a very personal choice. The question I would ask is, will paying off the low rate mortgage get you closer to your retirement goal faster? Or would it make more sense to get that money working in investments? Beyond the financial there is also the opportunity factor - will being mortgage free allow yourself or your wife to stop working? Take a year off and sail around the world?

I leave it to my wiser readers to comment on this one - perhaps I am missing something?

 

Thanks Jane.
We've got other investments as well, but I'm a bit risk averse after the last stock market bubble, that's how we ended up with the pile of cash. We've got investments in S&P index and other indexes (I try to stay in the index funds, that's what they taught us at B-school). Plus we got various funds in our 401K's and IRA's.
We're in our thirties so it's a bit early for retirement or stopping to work.
I guess if interest rates climbed it may make sense to not pay off the mortgage.

 

Cash not a bad investment right now.
however i think gold and silver and even foreign CDs are better than cash.

I suggested buying gold in my portfolio 5 months ago. its up 15% since then. I'm sad coz I didn't buy enough!!!

 

To Seneschal - is your mortgage fixed rate? If so the rate is good after tax. Home equity loans seem usually to be more expensive than first mortgages. You have lots of equity. I wouldn't be in a rush to pay it off (as long as you can itemize and deduct it). I wouldn't be in a rush either to invest the cash either.... dollar cost averaging is of course an option. My blog has comments on my expectations on the direction of the financial markets, but of course I could be wrong.

 

Yes, my mortgage is a fixed rate at 4.875%, I refinanced at the valley of the interest rate decline.

I tried investing in some bond funds but I found that I end up paying more taxes because the NAV declines while the fund generates taxable interest and dividends.