• WisBusiness

Monday, June 22, 2009

Benefits of a new mortgage in today's economy


By Kevin McKinley


Contrary to the belief of some sensible savers and investors, now could be a good time to take out a new, 30-year fixed-rate mortgage on your current home, and then pay the loan off as slowly as possible.

The macroeconomic motivation for this maneuver is that today's unprecedented low interest rates may lead to higher inflation tomorrow, which would bring higher interest rates the day after that (figuratively speaking).

The microeconomic reason for doing this is that the new mortgage could not only help you benefit from higher inflation and interest rates, but free up money that serve you better over both the short- and long-terms.

Conventional uses

Regular readers of this column will recall that last month's version detailed some sensible answer to the question, "What would I do with the money from my mortgage?"

Whether it's a lump sum or a lower monthly payment, any extra money could be used to pay down higher-interest debt, sock it away in savings to wait for higher interest rates, or ramp up contributions to at-work retirement plans.

But there are other less-conventional but still potentially beneficial ways to put your extra savings to work.

Buying off Uncle Sam

If you're eligible, a relatively reliable "investment" idea for your mortgage proceeds would be to use some or all of the money to pay the taxes on converting some or all of your IRA to a Roth IRA.

To do so, your adjusted gross income for 2009 has to be less than $100,000 (but that amount doesn't include what you convert). Next year the income limitation is scheduled to disappear completely.

There is a definite advantage paying taxes on your IRA withdrawal while the balance is low, and the likelihood of higher tax rates in the future is high.

But even if you convert your IRA to a Roth IRA now and it turns out to be too soon, you have at least until April 15th of the next year to undo the conversion, and perhaps October 15th of 2010 if you choose to file an extension.

Investing in long-term care

If you like the idea of getting taxes on your retirement plan out of the way while asset values and tax rates are relatively low, you'll love the idea of paying a little right now for a potentially-devastating expense down the road.

By definition, heading off to a nursing home or assisted living facility isn't "fun." It's even less so if you or a loved one don't have the money to pay for the quality of care you or a loved one want and need.

So using your mortgage proceeds or savings from a new, lower payment to purchase a long-term care insurance policy could protect you and your family from losing your home, not to mention the rest of your hard-earned assets.

However, whether your mortgage savings come via a big lump sum or a little more money each month, due to the ever-changing nature of both long-term care and long-term care insurance, it's probably best to purchase the insurance by paying monthly premiums, rather than forking over a lump sum up front.

Higher education costs

Even if you're comfortable that your savings, retirement, and long-term care needs are covered, if you have a child or grandchild you're well aware that the cost of sending that kid to college is going in one direction (up), while the amount of money available to pay for it is going in another direction (not up).

So it may behoove your family to consider putting your extra cash in a college savings plan, also known as a 529 account. You won't get much of a tax deduction on the deposit, but the earnings left in the plan are sheltered from taxation.

Withdrawals that are used for qualified higher education expenses are tax-free, and the parent or grandparent can maintain control over the account and the withdrawals.

And if the child in question doesn't need the money, it can still be transferred to use for another family member.

The only downside of the 529 account is that you will owe taxes and a small penalty on the earnings portion of the account if you choose to use the proceeds for non-qualified purposes.

For example, cashing it out to pay off your mortgage.

-- McKinley bought his first share of stock at the age of 14, and began working for an investment firm at 17. After graduating from the University of Wisconsin with a degree in economics and history in 1988, he became one of the youngest licensed financial advisors in the country. He is now a Certified Financial Planner practitioner, and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin that provides fee-based financial planning and investment management to individuals and families. Read McKinley's complete bio

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