Reducing mortgage principal a good investment


Q: Last year, my wife and I sold some property and now have $100,000 to invest after having paid all taxes. We owe $100,000 on the house we live in, which is valued at $250,000, and we own a rental property worth $180,000, which has a $54,000 mortgage and produces a cash flow of $300 per month. What would be your advice on the best way to invest?

A: You haven't specified the rates on the two mortgages, but unless they are very attractive,It seems to me you would be best off using the entire $100,000 as prepayments on the principal of your two mortgages, beginning with the mortgage carrying the higher interest rate. While this would leave you with no yield from an outside investment, it would have the same effect, either by increasing your cash flow from the rental or freeing up cash you are paying on the mortgage on your residence.

So why not the alternative route, investing the funds and using the yield to pay the mortgage interest? Well, since you specify that you're not interested in investing for growth, it seems to me likely you will have to stretch to find a fixed-income fund whose yield will match the mortgage interest. By "stretch" I mean assume unwarranted risk.

Most funds with current yields that approach 10 percent are either invested in long-term debt instruments, are holding relatively low-quality securities or are managing the big yield by effectively returning capital to their owners. That last situation represents the worst of all possible worlds, since that return of capital takes the form of taxable income.

The only situation in which a fund investment might be better than mortgage prepayments is if you have very low-interest mortgages on both properties and if you believe interest rates will remain low.

(Send letters, including your name, address and telephone number, to: Kenneth Hooker, The Boston Globe, Boston, Mass.)

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