opinons on how to use funds...

[ronn38]

At another time, I could probably solve this problem myself; but unfortunately, it's not another time.

A divorce is looming for me. We are amiable, not angry or vengeful, but the division of assets can raise ire’s. I believe we’re coming to a good solution—which includes my wife getting the house in her home town. However, I need to pay it off (approx. $50,000). I can generate that from disposable income with some belt tightening in about a year (avoiding having to tap into any deployed assets; i.e. stock, bonds etc.).

However, the time value of money is giving me pause….

The mortgage is 5.15%. So if I pay it all off now, no interest for the next year (I’d use EE bonds paying 4%). These bonds represent my “dry powder,” cashing them and buying DG stocks on dips, etc. So normally I wouldn’t touch them.

If I pay off the house from my income, I’ll pay interest for the year it will take me to do it; and if I use the bonds-- done deal. Then I got an idea, what if I used the bonds to pay the mortgage, and then spent the next year tightening my belt and deploying that same 50,000 into a high yield, low to moderate growth dividend payer (or five would make me more comfortable). I don’t pay the mortgage interest, and I lose the bond interest, but I gain a large position in a/some high yielding payer(s). I think with this “pay and invest” strategy, I’d come out ahead of the game at the end of the year.

I have to admit my thinking isn’t the clearest just not—and I’m generally not good at math to begin with—so I thought I’d seek some advice from the number-crunchers here. Does my by pay and invest plan generate a net gain? Is it the least expensive way to take care of this mortgage?

Thanks,

Ronn

[Kerim]

Hi Ronn –

Sorry to hear this news. I’m sure it cannot be easy, but I am glad to hear that it is generally amicable. With luck, it means brighter futures for both of you.

My very first thought is that if you plan to pay off the house in no more than one year, and the balance is only $50,000, it may not make a lot of sense to worry about trying to squeeze every dollar out of the deal. If you cash out the bonds and put them into dividend stocks, your net after one year will be – very roughly – $50,000 multiplied by the difference between the yield of those socks and the 5.15% interest rate on the mortgage. Let’s say you put it into something yielding 7.00 percent (I’m thinking ARCP just as an example). $50,000 * (.07 - .0515) = $925. Let’s call it $900 after transaction costs.

You’ve got to weigh that $900 gain against the market risk involved with anything yielding over 5.15%. I think something like ARCP is a pretty good bet, but one year is a pretty short time horizon, and you need to sell at the end of that year to pay off the balance of the mortgage. If you experience a price decline, it could wash away all of the potential benefit of doing it this way and you may have to come up with more cash.

Your temperament may be very different from mine, but the upside does not feel worth the risk to me. I’d sell the bonds and pay the thing off and be done with it. If you didn’t have to pay it off in a year – if you could just use the dividends to pay down the mortgage over time – I might feel differently.

Let me know if I have misunderstood what you’re considering.

Hang in there!

[hendi_alex]

Often, for a variety of reasons, the simplest solution is best. To me the simplest approach is to sell the bonds and pay off the house.

It seems to me that the decision to redirect the cash into equities is a totally different issue that just complicates the decision at this point. Over the next year you will have plenty of time to decide the allocation for any replacement savings.

[Dividend Watcher]

Sorry to hear it, Ron. At least it's amicable.

I would recommend talking to a tax advisor - either an Enrolled Agent or CPA. You'll owe income tax on any accrued interest on those bonds. Is there a way to structure the agreement for those mortgage payments so you can deduct any interest? Tax laws have changed significantly since my divorce. Paying it off over the coming year out of pocket may work out for the better for you.

Without knowing all the details, it's hard to say much.

[Dexter]

If the divorce cannot be completed until the house is paid off and you want it over with quickly, then sell the bonds and get it done.

If there is no rush, and it's ok to wait, then I think waiting is best. Pay the house off slowly.

I do not like the idea of touching the principal.

I'm sorry to hear about your situation

[EricL]

Ron,

First of all, sorry to hear about your divorce and best wishes for everything working out ok.

I'll echo what the other guys have said, don't let math get in the way and complicate things. If there are no tax consequences sell the bonds, pay off the mortgage, and wash your hands of it. You are leaving out a big part of the equation when thinking of using equities and yield to make a few bucks in the process...RISK.

[ronn38]

Guys,

Thanks so much for the insights! However, I don't think I was too clear.

a) at some point I will invest the bonds into stocks--this are my dry powered, separate from my fixed income bond allocation. So risk is factored in. The investment would be long term buy and hold; in essence I would be deepening my investments in the high yield section of my Dividend portfolio--which I will be doing at some point anyway.
b) There is a tax consequence to using the bonds; but that will be there whenever I use them.
c) If I used earned (read already taxed) income to pay off the house, I don’t lose the interest on the bonds plus get taxed on them. But it takes longer and I accrue mortgage interest. But I don't dig into my "principle."
d) My question is, if I use the bonds to pay off the mortgage, BUT STILL penny pinch for a year and match the bond outlay with taxed cash into stocks, am I ahead of just using taxed income to pay off the mortgage over a year?

Am I just playing games with my own head? Is “pay off the house and move on” the clear thinking here?

My inclination is to use the bonds, and penny pinch. I feel that way I’m done and I really don’t lose the bond funds (save the tax issue).

I appreciate the kind thoughts…. and math help ;-)

Ronn

[Dexter]

I'd say use bonds and penny pinch. As I said before it was me I really would avoid touching the principal.

You had said that the bonds pay 4%, why cash them in just curious? It seems that 4% on an investment on which taxes are deferred and the principal is guaranteed is hard to give up...then again the grass is always greener on the other side, hence I completely understand your inclination to let the bonds go.

[NilesMike]

(02-21-2014, 11:51 AM)ronn38 Wrote: Am I just playing games with my own head? Is “pay off the house and move on” the clear thinking here?

My inclination is to use the bonds, and penny pinch. I feel that way I’m done and I really don’t lose the bond funds (save the tax issue).

I appreciate the kind thoughts…. and math help ;-)

Ronn

Sorry to here of any marriage ending in divorce, it's just sad.

That being said, when there is a bad situation decisive and quick is the best way to move forward. Pay it off and start living.

Perhaps, this mathematical masturbation is a coping mechanism drawing your attention to the math and away from the problems that led to the divorce? No judgment, just observation.

Cut the anchor rope and set sail!