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Pay off loan or not?
Old 07-23-2007, 05:33 PM   #1
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Pay off loan or not?

Hello, everyone. This is my first post. I am impressed by the collective wisdom of this group, so here goes:

I own a building lot on a golf course that I'm holding for investment and/or possible retirement home. I anticipate building or selling in 3-5 years.

I have sufficient funds (currently parked in a tax exempt money market fund--I'm in the 35% bracket) to pay off this loan right now ($110,000 @ 5% interest-only; balloon due in 2 years).

This MMF constitutes 10% of my portfolio, and represents the bulk of fixed income portion of it. I will be receiving a non-COLA pension as early as age 55 (I'm 53), so I'm comfortable with such an aggressive equity component. Any new $$ I get in the coming years will be added to the MMF, so I'll be raising the fixed-income percentage as I get closer to retirement, no later than age 59.

Question is: am I better off reducing my carrying charges by paying off the note or continue to pay the interest and have it be offset by the interest on the money market fund? The loan is a second mortgage, so the interest is deductible.

Thanks.
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Old 07-23-2007, 05:53 PM   #2
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Welcome to the forum.

As for your question, I'd like to know if paying off the mortgage will significantly impact your after-tax money. You're almost 6 years from getting free access to any IRA money so you could find yourself short of readily available cash if you paid off the note. If this isn't a concern, I'd lean towards paying off the note. You can get slightly more than 5% in brokered CDs but I don't think it's worth the trouble.

I also suggest you raise your cash/bond portion now to be slightly more conservative.
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Old 07-23-2007, 06:52 PM   #3
Confused about dryer sheets
 
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2B: Paying it off would have only a short-term impact on the after-tax account as I'm living well BYM and saving all bonuses and stock grants.

Also, upon retirement I'd receive a cash severance as well as continue to vest in the RSU plan, which I would use as a bridge to get to 59 1/2.

Thanks for the input.
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Old 07-23-2007, 08:10 PM   #4
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If interest earned and paid are a wash and you're not worried about liquidity pay it off.
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Old 07-24-2007, 07:10 AM   #5
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If you are in the 35% bracket and are earning less than 3.25% in your tax free MMF, and as Darryl says are not worried about liquidity, I would pay it off if I were you (5% x .65 = 3.25%). If you earn more than 3.25% then it may be better to pay the interest. Have you thought about the implications of AMT? Better do that...

On the flip side, there are also psychological aspects (positive) to being completely debt free, but if this is a second mortgage, you wouldn't really be debt free, only free of debt on this piece of property. We don't have any worries about liquidity, and it sure feels great to be debt free...'nuf said...
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Old 07-24-2007, 07:16 PM   #6
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Quote:
I have sufficient funds (currently parked in a tax exempt money market fund--I'm in the 35% bracket) to pay off this loan right now ($110,000 @ 5% interest-only; balloon due in 2 years).
5% interest rate is very attractive. If you are parking your money on a money or saving account paying about 5% currently, it will be a wash. However, if you direct your money to the stock market, you will be better off not to pay off the debt since the long-term return should exceed 5%.
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Old 07-24-2007, 09:33 PM   #7
Confused about dryer sheets
 
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I don't plan on directing any more money to the stock market as I'm looking to reduce my equity exposure. So it really is a wash, with a MM tax-equivalent yield of just over 5%. AMT exempt, as well

I'm leaning to paying it off, and reduce my debt.
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Old 07-25-2007, 03:14 PM   #8
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I'd pay it off just to reduce the hassle since it is a wash. No way it should go to equities for just a 2 year period. However, you might also think about any impact paying it off might have on your credit rating. You never know what they're going to make of that, and it can affect thing like your insurance rates.
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