Q: I am retired and widowed, and my house is all paid for. It is worth about $100,000. I pay no interest on anything, but my income from annuities and stocks amounts to about $40,000 a year. I pay income taxes of about $13,000 a year. Should I borrow on the equity of my house and invest in Ginnie Maes or mutual funds, so that I will be paying interest to decrease my income taxes? A It is strongly recommended that you discuss your individual concerns and needs with your own tax adviser as soon as possible. It is virtually impossible to generalize on such matters as tax benefits and deductions, since there are so many individual factors that must be taken into consideration.
However, it must be pointed out that although interest paid on a mortgage (deed of trust) on real estate is deductible, there are a number of limitations imposed by Congress, in an effort to curtail the creative use of interest deductions to reduce taxes. One such limitation is that interest incurred to purchase or carry tax-exempt securities is not deductible. If you use your mortgage proceeds to buy tax-exempt municipal bonds, the interest deductions may be disallowed.
However, since mortgage interest rates are quite low at the present time, and since everyone is talking about refinancing, you should analyze your financial situation independent of any tax considerations. You have about $100,000 in dead equity. Have you considered whether you have enough cash on hand for any emergencies that might arise in the future? There are too many senior citizens who unfortunately are house rich and cash poor. Maybe this is a good time to pull out $50,000 or $60,000 from your house. Whether you invest that money in tax-free municipals (where your mortgage interest payments would not be deductible) or you invest those funds in government securities (where the interest payments, or at least a portion of them, may be deductible) the fact remains that you will have this money available when you need it.
Currently, mortgage interest rates are hovering around 10 percent. We have no guarantee that the interest rate will stay the same over the next several years. Thus, now is a perfect time to consider pulling out that equity for your future needs.
Needless to say, you will have to qualify for a loan, and you should discuss your needs and your qualifications with your local mortgage lender.
You will find many refinancing options available to you. Oversimplified, here are some mortgage proposals for your consideration:
*FHA. The FHA rate is currently very attractive. If you obtain such a loan, it would give you the opportunity to have a truly assumable mortgage, so that if you ever want to sell your house in the future, it would greatly assist your potential buyer. There are dollar limitations on the amount of an FHA loan, and these should be discussed with your potential lender.
*Adjustable-rate mortgage. A few years ago, the concept of the adjustable-rate mortage was very attractive. The spread (difference in rate) between the fixed conventional and the adjustable mortgage was sufficiently large so as to make the adjustable loan attractive -- at least for the first-time home buyer or the young couple just starting out. However, since fixed conventional mortgage rates are quite low now, and since there is always the uncertainty of the future of our economy, I personally would not recommend an adjustable-rate mortgage for your particular needs.
*Fixed conventional rate. Here, too, you will have to make a difficult decision. You will be offered either a 30-year rate or a 15-year rate. Normally, I would recommend the longer term, even though you would be paying more interest over the life of the loan. For most homeowners, who probably will not keep their home more than seven to 10 years, it really makes no sense, in my opinion, to pay more into principal each and every month, which is what happens when you obtain a 15-year rate. However, in your particular case, it might make sense to consider obtaining a 15-year loan, thereby paying off your house earlier, and rebuilding your equity.
Again, all of these issues and factors must be based on your own particular needs and circumstances.