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- Manlobbi
Halls of Shrewd'm / US Policy
No. of Recommendations: 2
Mungofitch and others.
My nephew is 38 years old,
He has a mortgage on his house at 4% rate.
He also has money is a bank with more than mortgage accoumt getting around 4%.
He wants to know if he should pay off the house and also where to invest any cash he has.
any comments greatly appreciated
No. of Recommendations: 6
Having cash gives you freedom to do things. Mortgages can't be called as long as you make the payments. (At least in the US.) I would vote for accelerating the mortgage payoff, but not draining the cash so you have a cushion if something bad happens or you can take advantage of a market downturn.
No. of Recommendations: 6
Having cash gives you freedom to do things
Sounds good to me. I would give the same advice even if the interest being earned, after tax, was a bit less than the interest being paid...for a while, anyway.
Amazing opportunities to deploy cash come around pretty regularly, even if the timing is unpredictable. I would be in no great hurry to deploy the cash. A very small rate of loss on interest differential, for a while, is a reasonable price to pay in order to maintain the power to pounce. This requires some fortitude and patience, but not that much. It is not at all hard, in the average year, to invest at an after tax rate of return considerably higher than a nominal 4%.
As I understand it, that mortgage rate could not be duplicated now in the US, and perhaps not for a long time.
Jim
No. of Recommendations: 0
thanks
at his age 38 where would you deeply the cash now>
No. of Recommendations: 0
MMF...and practice patience.
No. of Recommendations: 4
MMF...and practice patience
T bills and practice patience.
And spend the intervening time reading and figuring out what you'll buy next time there is a panic.
Jim
(vast allocation to t bills right now, first time I've ever had any)
No. of Recommendations: 1
He has a mortgage on his house at 4% rate.
He also has money is a bank with more than mortgage accoumt getting around 4%.
He wants to know if he should pay off the house and also where to invest any cash he has.
1) Very good rate
2) He could get 5%-5.3% at UFB or VIO or Raisin
3a) No. No only No, but HELL no.
3b) Invest? Is he a beginning investor? If so, VASGX (Vanguard LifeStrategy Growth Fund)
4% is a good rate. He should keep it, and when/if rates drop he should refinance. My target was always when the new rate would save me $100/mo in interest (not payment. Interest) then I'd refinance at that new lower rate.
No. of Recommendations: 9
that mortgage rate could not be duplicated now in the US, and perhaps not for a long time.
The 2nd time I refinanced this house, I told the loan officer than if rates ever got down to 5% I'd refinance again. We both had a laugh, at the absurd idea that we would ever see 5% in this lifetime. So never say never.
The great thing about 30 year fixed rate mortgages is that it works like a ratchet in your favor. When rates go down, you refinance. When rates go up you stand pat. Much better for us than the way mortgages work in other countries where the rate can readjust every 5 years.
Paying 4% interest on a non-callable, fixed payment, 30 year maturity loan is about the cheapest money you will ever see. It is financially not smart to pay it off any faster than required.
No. of Recommendations: 11
"Mungofitch and others.
My nephew is 38 years old,
He has a mortgage on his house at 4% rate.
He also has money is a bank with more than mortgage accoumt getting around 4%.
He wants to know if he should pay off the house and also where to invest any cash he has.
any comments greatly appreciated"
There are many factors to consider. Does he get to use the interest deduction to save on his taxes, or is he just taking the standard deduction? Is he knowledgeable enough to invest that money and earn a decent return? Is the house owned just by him, or is it owned with another person (perhaps a spouse) where he might lose a percentage of the house if there is a breakup? Does he have other income streams which he could afford to pay off the mortgage if his investment goes south? Does he absolutely need to make a decision immediately? Is he the type that would find other uses for the money (buy a boat or a new truck) if he doesn't pay off the house or invest the money right away? Lots of stuff to consider.
Ultimately though the only factor that really matters is one that only he can answer. What would help him sleep best at night?
Some people sleep best knowing their house is completely paid off and they don't have debt hanging over their heads. Others like me, like the optionality of having a chunk of cash sitting around. I am disciplined enough to be willing to let the cash sit there until I find a good use for it.
Personally, a mortgage is an uncallable loan and he is getting a great rate on it so I would prefer having the cash in the bank to give me more options to use it in the future. However, as mentioned I am disciplined enough not to "waste" it on new toys. I also feel I am knowledgeable enough about investments that I believe I could find investments that could give me a better return than the low interest rate I am being charged on the loan. Furthermore, I have other sources of income that I could use to pay of the mortgage if I screwed up my investment and lost it. That is me though.
My sister and her husband recently inherited a large chuck of cash and they immediately used it to pay off their cheap mortgage. They both sleep better at night knowing they own their house outright and are not on the hook for debt payments for the next 20 some years.
What would help your nephew sleep best at night?
No. of Recommendations: 5
“Personally, a mortgage is an uncallable loan and he is getting a great rate on it so I would prefer having the cash in the bank to give me more options to use it in the future.”
Totally agree. I am sitting on a 3.75% 30 year mortgage and I have not made any additional pre-payments in 7 years.
No. of Recommendations: 3
I'll add, send him the link to Shrewdm, with some board recommendations and give him a copy of Morgan Housel's book "The Psychology of Money". Or there are many others, but that's a good intro.
You know the ole give a man a fish vs. teach a man to fish proverb.
