Avoid house-rich, cash-poor pickle

Which is better investment for excess cash?

By Inman News Feed
Add Comment Add Comment | Comments: 1 | Posted Apr. 20, 2010

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Which is better investment for excess cash?

Benny Kass
Inman News

DEAR BENNY: I am 58 years old and married. I have 22 years left on my 30-year mortgage, which is at 5 percent. I have a Roth IRA. I have some extra money to invest. In this current economy, what might you suggest? Should I pay money toward the principal on my mortgage? Put it in the Roth? I lost money in the stock market (bank stocks), so please don't suggest that I go back into stocks. Thanks in advance for any knowledge you might share. --Tommy

DEAR TOMMY: Your question is perhaps one of the most difficult ones I have received. I have two crystal balls on my desk and, unfortunately, both are cloudy.

I don't recommend paying off your mortgage, but you may want to consider sending in extra money every month. This will dramatically reduce your loan balance and shorten the paydown period. If you decide to send in additional money, please make sure that you write "extra payment toward principal" on your check as well as on the payment statement you send to the bank.

I know that readers will challenge me on this; many homeowners believe firmly that it makes a lot of sense to pay off the mortgage so that you do not have to pay all of the interest that accrues. I understand this position, but too many of my clients end up "house rich and cash poor" at age 65 or older. I believe it makes sense to invest your extra cash rather than pay off the mortgage.

Keep in mind that mortgage interest is tax deductible, so the "bite" is not a dramatic as the monthly payment.

OK! Now readers will send me e-mails asking "Where can I invest?" Banks are currently paying less than 1 percent on most deposits. That's true, but I believe that by the end of the year, banks will start paying more for long-term CDs (certificates of deposit).

In the meantime, I would:

1) Start sending in extra money every month to your mortgage lender. Take your monthly payment (only for principal and interest and not for any escrows) and divide it by 12, and that number should be the minimum of any additional payment;

2) Yes, you should consider increasing your Roth investments, but first you should talk with a financial advisor to get assistance as to how much to invest;

3) Have you considered buying real estate for long-term investment? Prices are low, and while investment money is hard to locate, it's not impossible, especially if you can put up a sizable downpayment.

If you are not interested in real estate, invest the balance of your additional cash in laddered CDs. This means that you open several accounts with staggered due dates. As the date approaches for each account, you roll over that CD for another period of time. And try to get CDs that allow you to withdraw without penalty at any time.

These are my suggestions; I welcome responses from readers.

DEAR BENNY: My husband purchased a condominium 20 years ago as an investment and has rented it continually during the course of ownership. A few years back the condominium board voted successfully to eliminate all renters. They gave all rental units five years to cease renting. Additionally, they voted that all condominiums must be occupied by the legal owner only.

I can understand the desire to eliminate rentals for all new purchases. Can the association force us to cease renting -- thereby affecting our income -- and force us to sell in a down market? --Susan

DEAR SUSAN: This is a very serious issue facing condominium associations and unit owners throughout the country. There is the perception among associations as well as mortgage lenders that somehow tenants are going to create problems within the community.

Lenders such as Fannie Mae, Freddie Mac and even the Federal Housing Administration (FHA) impose caps on the percentage of absentee owners.

Perhaps there is some truth to this perception, but from my experience some tenants make better "owners" than the owners themselves.

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1. mike said... on Jan 21, 2013 at 06:07PM

“I am 62 years old and retired. I have several rental properties. I'm getting older and would like to start selling the real estate. I have around 1.2m in net worth. Since CD are low and stock are not stable. Is the any other instruments You would recommend to invest.”


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