No. of Recommendations: 4 you have a well thought out amount of home equity vs financial investments?

I mean, is there a reason you have a $300K mortgage and $100K in a taxable account vs the other way around?

Increasing home equity is equal to investing at your mortgage rate, after all tax effects. After tax, your mortgage is probably only worth 3-4%, versus long term stock returns of twice that. But the mortgage prepay "return" is risk free.

So I guess if you have a long time horizon, you should have a bias toward less home equity and more in stocks. Does anyone have a rule or guideline for home equity % vs age?


I think that this decision is based on so many variables which are different for each individual, that it's relatively impossible for there to be a rule/guideline that would satisfy the myriad requirements, which include:

Tax Effects - Marginal ordinary income tax rates, LTCG tax rates, and AMT exposure both before and after 'retirement'.
Mortgage rates
Home ownership vs: renting
Individual Risk Tolerance
Availability of discretionary dollars

Currently I make mortgage payments at an after-tax rate of 3.91%. I need to earn (on average) an annual return of 4.6% to offset the mortgage cost. So far I have been able to do this. I have no AMT exposure. Currently I have 90% of my mortgage balance available in taxable accounts (discretionary dollars).

As I'm in my mid-50s, I would feel more comfortable if I had 100% + of my mortgage principal available in taxable accounts. I say more than 100%, because liquidation would result in taxable gains, thus tax liabilities would also have to be covered by the taxable account. This 100% + number is based on my own individual risk tolerance--I would feel more comfortable knowing that if I had to remain where I currently live and hunker down, I could pay off the mortgage, thus decreasing my monthly outgoing expense dollars considerably. I intend to meet this 100% + goal by the end of 2005.

When I retire in 8-10 years, I intend to move and will therefore sell my current property. Whether I buy/rent/mortgage a new property will depend on the tax laws at the time, my individual tax rates, risk tolerance, etc. IOW, the decision will have to be revisited again.

One financial advisor that I know always recommends that one goes into retirement with NO mortgage debt. For myself, I tend to agree, as I would like to have the option open of a reverse mortgage if dire circumstances make it necessary. OTOH, here's an article from AARP that indicates more seniors are taking on more home equity debt than ever before in history:

Although they don't necessarily recommend that route:

Experts say that before you borrow or refinance—especially if you're ready to retire and will have less income—have a hard look at your financial situation and be sure you can pay off the debt. It may be easy these days to get large loans, but just because you can get more money, Zhu says, doesn't mean you should. "You better think twice before you jump."

Here's another one, not as recent, that goes into more detail on senior debt:

"Today's 50- to 70-year-olds are leveraged to the max," says Leonard Raymond, executive director of Homeowner Options for Massachusetts (HOME), which offers older people life planning services. "They are involved with credit cards and refinancing. They have a different perspective on debt."...

A growing percentage of mortgage debt, however, consists of home equity loans or lines of credit, often spent on cars, vacations and home improvements.

"Real estate is not as liquid as some people think," says Cohen of CFD in New Jersey. "If you run into trouble, things can go downhill fast."

I also found it interesting that ~98% of the AARP articles containing the word 'mortgage' are articles about reverse mortgages.


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