Quote:
Originally Posted by n00b590
A: $800k stocks, $100k bonds
B: $800k stocks, $200k bonds, $100k mortgage
Unless you have a magical bond fund yielding >2.75% after-tax, A is superior.
Assuming a 30yr fixed ~2.5% mtg which is available today, you could buy bonds that offer superior yields, plus you are getting the tax deduction on your borrowing [let's assume Homeowner is in this case. If not then not, maybe not worth it.]
So, I see Berkshire Hathaway Finance Corp at Fidelity at 2.81%. That's AA2/AA rated, tenor of 27+ years [close enough for govt work], you're duration matched.
Southern CalEdison you can get 3.34% for A3/A- in March 2049. CSX Rail at 3%.
With BH you're making 30bps pretax and say 19.5 bps net a year on, say, $500k mortgage: $975 a year plus thousands in mortgage deduct annually. That's real money. You can do your bond purchase at Fidelity in <30 seconds, one could educate themselves on IG bonds fairly quickly to get up to speed first. Have I missed something?
It's more risk than paydown, but you don't have equity risk. You do have BH's credit risk. And the right decision is should be properly driven by risk tolerance, of course, as n00b points out.
Most people would put the money in stocks if they were thinking about doing this and they may not be as risk-seeking as they think if markets go down and stay down. If you can truly stand the equity risk and have the monthly cash flow to pay your debts, then long and levered stocks is the way to go. It's definitely a small % of people for this option.