This economy sucks. Mr. Pug is 51 and not finding a job. We’re going to have to be making some decisions on important issues soon. I need to know if the questions below merit going to a certified financial advisor, or if it’s common knowledge among the finance gurus on this board.
We have:
(a) A batch of stock in one company worth a bit of money. It’s about 3/4 of our retirement stash.
(b) A home with a mortgage in an area with excellent real estate potential (bay area of California).
Should we sell the stock and put it into our home on the theory that real estate is the best place to keep your money? Or is draining your retirement stash always a stupid thing to do? We’ll still have a bit in 401(k)s, and if the house is paid off or nearly paid off, I’ll be able to start putting money into a 401(k) again.
If you pay off your mortgage, you lose the home interest deduction. It also reduces your liquidity to put all your savings into a house.
IANAFA, but I would also consider diversifying your stock holdings in the one company you mention, as a way of getting your eggs out of that one basket. Mutual funds are an option.
If your husband doesn’t have a job, it may not be a good idea to reduce your liquidity. Suppose you need to sell your house. What will you live on while you market it?
Free advice, and worth exactly what you paid for it.
Alot of this depends on the balance on the house loan. In the SF bay area houses can be pretty damn pricey. What good is a tax exeption when you have no income. The other side from my non-FA POV is that IIRC the stock market on average has a higher average rate of return than real estate. As shodan put it…diversify. Especially since no offense intended you don’t have as many years to make up for a loss in a one trick pony portfolio as some of us.
If its just to strech things for a while to get Mr. Pug a job adjusting your tax withholding to get more take home pay might be a decent short term fix. Of course that will come back to haunt you in a year or so.
I forgot to add: I am securely (I hope) employed and making a good income. If we do nothing, we can still scratch by and keep our home if we give up virtually everything else, i.e., a second car, going out, having a dog, etc. But I was hoping to live a little more comfortably than that, and I thought that by paying down the house we could do that and still earn interest in the form of equity.
It simply isn’t possible to give you the kind of advice you’re seeking without a ton more information – information, frankly, that I don’t think you should post on an Internet message board.
I would strongly advise talking to a financial advisor or a CPA.
Since you have income coming in Shodan was correct about the deduction being lost if you pay off your loan. I don’t put much stock in it, but there has been concern about the real estate bubble bursting. If that happened then having all your eggs in that basket would really be bad. As to the amount of equity you are earning; the gain on equity is the amount you can sell your house for over what you paid for it. The amount of equity gain will not change if you pay off the house. All that does is save the interest, which is why the home owner’s deduction is so important in your decision. The government is helping you pay the interest (thru the deduction), while you are making a gain by investing the “pay-off money” elsewhere. The prior posters advice to diversify is very good.
[ul] [sup]Good luck![/sup][sub]and yes this advise is only as good as what you paid for it.[/sub][/ul]
Do you hold the stock in a retirement account (IRA, 401(k), etc.)? If you do, there will be taxes and penalties to take into account if you cash out. If you must access funds from a restricted account, it may be better to take a loan from your 401(k), avoiding the taxes and penalties, but obligating yourself to replenish the 401(k) (which you might intend to do anyway once your husband gets a job). (If you just want to diversify, you can sell some shares and buy different stocks/bonds/money funds within the account without penalty.)
If you do not hold the stock in a retirement account subject to any special tax benefits, then you will not face any penalties if you sell, but you will realize taxes on the gain (probably at the capital gains tax rate).
In any event, I do not think that “paying down the house” sounds like a good idea. What you want, as others have noted, is liquidity–extra cash now for living expenses. Paying down principal is exactly the opposite–tying your money up in the house. Even if you pay the house off completely, you trade your current liquidity (the stock) for liquidity in small amounts over time (the relief from monthly mortgage payments). Why not, if the stock is not held in a restricted account, instead just sell off enough stock each quarter (or other timeframe that matches your need for cash) to pay those extra living expenses? Or, if you do need to diversify, sell all of the stock now, keep a portion in a short-term money market-type account, and reinvest the remainder in a no-load broad-based mutual fund (or perhaps better, a bond fund since it sounds like you do not have a lot of time before investment and this is less risky than a stock fund).
One more thing: have you refinanced your mortgage lately? While banks don’t like to give terms of less than 10 years on fixed rate loans, and it doesn’t sound like you’d like a term any longer than you have now, rates are significantly lower than they were only 2-3 years ago, and you should not be paying more interest than is necessary. Your husband’s lack of a job may or may not matter to the bank, depending on the equity you have in the house and the amount you earn at your job.
I am sorry to hear that you are having a rough time. Hope a job comes soon.
IANAFA either but those questions are exactly the kind that CFPs are trained to answer. Add me to the list of people who think you should be more diverse in your stock holdings, especially if your age is close to Mr. Pugs.
This is really a myth. Not that you lose it, but that it benefits you in a decision like this. If you have $300k in a savings account earning 6% interest, and owe $300k on a mortgage at 6% interest, then it is exactly equivalent to your bottom line, whether you pay it off or not. The reason is that the deduction you get on the interest you pay out to the mortgage company is exactly offset by the inrcease in your income from the savings interest. If the interest rates or not the same, or liquidity is important, those are valid reasons for making a choice one way or another, but the mortgage interest deduction is not.
In any sane income tax scheme, if interest in is taxed, then interest you pay out has to be deductible. There are exceptions to this like on personal loans and credit cards, which the gummint does because they can get away with it, but on any investment options, they have to balance. There have been tax reforms proposed to do away with the mortgage interest deduction, but every one of those has been balanced by a provision not to tax interest income. It has to balance.
The mortgage interest deduction is not some tax break to encourage home ownership, but a necessary component of our tax system which treats interest earned as income.
I echo Sauron and Lagomorph – there are too many variables here, including things like age and amounts. You need some financial advice from someone who is trained in this stuff, looks at the details of your situation, and then helps you out.
Some such advisors charge for their services, and of course you think you can’t afford it. Some advisors are willing to take you on spec – that when you are more financially secure, you’ll give them some business like investments.
[sup]Good luck![/sup][sub]and yes this advise is only as good as what you paid for it.[/sub][/ul]