Like most people, I have a mortage on my home and although it is currently at a very low interest rate (3.25% ARM), it will eventually adjust sometime next year. Unlike many other people, however, who might have difficulty with raising interest rates on an ARM, I won’t be one of them. I am close to accumulating enough cash to pay off my mortgage entirely but I’m contemplating what course of action to take.
I have several options when my ARM adjusts:
Option 1 – Accept the adjustment and pay the new (higher) interest rate.
Pros: At my current income level I am close to being phased out of ROTH IRA contributions along with most other tax deductions so a higher interest rate will actually increase my right offs and reduce my AGI to a point where I might be able to contribute to Roth accounts.
Cons: Not having any idea where interest rates will be in the future after the adjustment each year could leave me vulnerable to ever higher interest rates and create a disruption on my scheduled cash flow operations. There is a cap of 9% interest in a worst case scenario.
Option 2 – Pay off the mortgage with cash holdings
Pros: No more mortgage! No more interest expense! Freedom!
Cons: Paying off my mortgage will mean a large depletion of my accumulated cash holdings. Although the heavy burden of the mortgage will be off my back it may leave me vulnerable should something unexpected happen. I also worry about the possible destruction of my home and failure of insurance company to repay in extreme circumstances. I’d be left with literally nothing if my insurance company refused to pay (for whatever reason) or becomes insolvent after a major disaster. With existing cash holdings, I could easily move to a new city/state/country and start over if I needed.
Option 3 – Use 0% APR Credit Card Transfers to effectively eliminate large chunks of mortgage.
Pros: Zero percent mortgage is great. Exchanging a 100% secured asset for 100% unsecured debt is a no brainer. By shifting the burden from mortgage bank to credit card bank, I get to keep my cash holding to invest and earn higher returns while eliminating high variable interest debt on the mortgage. In a worst case scenario if I have to file for bankruptcy I’ll get to keep my house free and clear.
Cons: No tax deduction on interest (although there wouldn’t be any at 0% APR anyway). FICO? Not sure what adding tens of thousands of debt will do to my FICO but it can’t possibly be good. The really big issue is if the credit card companies pop the APR for various reasons (universal default clause, etc).
Option 4 – The Ultimate Real Estate Investment
And finally, I conclude by what I consider to be the Ultimate Real Estate Investment dream and it would effectively allow many Americans to become nearly self-sufficient and provide a high level of stability and security for themselves.
I could easily take money from my IRA and use those funds to pay off my mortage. Effectively, the IRA would become my bank or landlord and I would pay myself interest (or rent) at high enough levels to earn 10% return. I’ve calculated that if I loan myself my own money (100k) at 10% interest for 30 years, my ROI would be $1,983,739.94! Yup, nearly 2 million dollars using this type of transaction.
Of course the added benefits would be tremendous:
- I would own my home.
- In theory, I could right off the mortgage interest off my IRA loan although I’d happily give up this credit if I could do this.
- I would have a guaranteed stream of income for my retirement coming from myself. No one gets hurt if I fail to pay except me.
- If need be, I could sell the home at the end of 30 years and keep the profits from appreciation tax free.
Unfortunately, the IRS doesn’t allow you to do this with family members or with your own home. You could however arrange a “house swap” with a non-family member in which your investment partner would own your home and you own your partners. I’m told savvy real estate people do this with many of their partners but I’ve yet to tap into this network.
The more important question with this last scenario however is why the government doesn’t really allow you to do this? This scenario essentially frees every person to be the master of their own destiny. Perhaps that’s part of the reason why you can’t do it; Option 4 effectively eliminates the need for social government.
I welcome your comments.