Paying Off Your Home Mortgage

The American Dream is to own your own home. Of course, when we say, "own," that doesn't mean, for most people, that the home is debt-free. Most homeowners have home mortgages, but most also dream of one day owning their home outright, with no debt and no monthly payments.

Given this desire, if you have a financial windfall and have the ability to pay off or substantially pay down your mortgage, should you? This is not an easy decision. Here are some of the pros and cons to consider:

Reasons to Pay Off Your Mortgage

• You eliminate the monthly payment, freeing up that money for savings.
• Paying off the mortgage is like making a guaranteed investment, equal to the mortgage interest rate, which is likely higher than what you could earn from other conservative investment alternatives.
• You sleep better at night without the stress of mortgage payments.
• You don't anticipate needing the cash used to pay off the mortgage for any other purposes.
• You still have sufficient liquid reserves for emergency use.

Reasons Not to Pay Off Your Mortgage

• You have other debt, such as credit cards or auto loans, with higher interest rates and which is not tax-deductible.
• Interest on a home, mortgage is generally tax-deductible.
• You have a mortgage with a low, fixed-rate interest rate, and there are investments offering potentially higher returns - and you are comfortable with the risk associated with those investments.
• You recognize that you will not consistently save the monthly cash flow increase available from eliminating the mortgage. After a few months of prudence, you are likely to see a gradual increase in your lifestyle, spending this new-found income.

When you have a mortgage, you recognize the necessity of meeting your financial obligations and you budget your cash flow. However, when you don't have a mortgage, and it is just your personal commitment to consistently save money each month, the result is often similar to the New Year's resolution to get regular exercise - by February it is just a memory. If you want to begin reducing your mortgage term, another alternative is to simply make regular extra payments. One popular approach is to make biweekly payments, which means you are making payments on your mortgage every two weeks. Therefore, over the course of a year you are making 26 payments, resulting in one extra month's payment per year. While that might not sound like much, you can knock six or seven years off of a 30-year mortgage if you begin a biweekly payment plan at the time your mortgage starts. If a biweekly plan interests you, discuss it with your lender and determine if they charge anything to process these extra payments. I would be very cautious about utilizing any biweekly payment plan that is set up by someone other than your lender. I've never liked the idea of giving a third-party access to drafting a bank account and depending on them to timely remit the payment to the lender. Alternatively, you can just regularly add an extra amount to your monthly mortgage payments and accomplish the same reduction in the term of your mortgage.



Opportunities in Real Estate Investment Trusts

Until the national real estate market and the overall economy began sliding downward, real estate investment trusts (REITs) enjoyed out-sized returns for many years. This came to a screeching halt in 2007 and REITs declined more than the overall market. Is there opportunity in this tarnished sector? REITs came into existence in 1960 as a structure allowing the public to invest in income-producing real estate. Many REITs are publicly-owned and trade like stocks. Normally, a REIT focuses its holdings on a certain type of real estate, such as: shopping centers, office buildings, warehouses, industrial, apartments, health care facilities, etc. The brutal decline nationally in home values, the increasing foreclosures due to the subprime mortgage crisis, and the slowing of the economy may work to the favor of REITs that own apartments. People who have lost their home or who formerly might have purchased a home, but no longer qualify for a mortgage, are making the apartment REIT sector look like a promising investment. In addition, in times of economic uncertainty, many people are choosing to become renters instead of homeowners.

Another item that makes apartment REITs an appealing investment is a decision by the Office of Federal Housing Enterprise Oversight to increase, by $200 billion, the mortgages that can be purchased by Fannie Mae and Freddie Mac. The availability of this financing gives apartment REITs an advantage not available to other types of real estate. Of course, not everything is rosy, there's always something to be concerned about. As you might expect, there is a strong connection between the demand for apartments and job growth. A prolonged economic slump and rising unemployment would not only dampen the demand for apartments but also restrict the ability of landlords to raise rents - good news if you are a tenant - bad news if you own the apartment building. In addition, there is a huge supply of unsold homes that weary homeowners or speculative investors might opt to rent as opposed to sell. An avalanche of new rental homes would compete with apartments, reducing the investment attractiveness of the apartment REITs. However, even if the growth potential of apartment REITs gets limited, another reason to consider them is income. There are many of these REITs with annual dividend yields of 4% - 6%, making them an attractive option for investors requiring regular cash flow. There are many publicly-traded apartment REITs, but here are a few of the larger ones: Equity Residential (EQR); Apartment Investment & Management (AIV); AvalonBay Communities (AVB); UDR Inc. (UDR); Essex Properties Trust (ESS); and Camden Property Trust (CPT).

Gerald A. Townsend, CPA/PFS, CFP®, CFA® is president of Townsend Asset Managment Corp., a registered investment advisory firm. Email: Gerald@AssetMgr.com.