Q. Our home is appraised at $851,000. I think we could sell it for much more than that. In 2008, for instance, it was appraised at $1,077,000. As an 18-year-old house, it will soon be in need of significant repairs— roof, windows, air conditioners, etc. — and we would like to make several improvements.
I have a15-year mortgage at 5.25 percent with a maturity date of March 2018. The balance owed is $187,132. The monthly payment is $2,352, not including taxes and insurance. Annual taxes are $15,569 and insurance is $1,779.
I have a home equity line of credit balance of $250,000 at an interest rate of 4.24 percent. The monthly payment is about $900, but has been much higher when the prime rate was higher.
Here’s the problem: My current income does not allow me to pay down the HELOC. Worse, it is likely to stay that way. We have borrowed against our life insurance policies and our 401(k).
I am trying to determine if we need to sell our house. Is there an alternative that would make this work? I am 58. I plan to work actively for another 7 or 8 years, but do not want to work full time much longer than that. Do we need to sell, renegotiate our loans, or what? —R.D., by email from Austin, TX
A. You can reduce some of the cash flow problem by refinancing the current first mortgage to a new 30-year mortgage. At 5 percent, for instance, a new 30-year mortgage for $187,000 would have a payment of about $1,004 a month. That’s a reduction of more than $1,300 a month. With the HELOC at 4.25 percent and paying interest only, there isn’t further opportunity to reduce payments.
Reducing your monthly payments, however, may not deal with the fundamental problem. If you need to refinance your payments down to $2,200 a month ($1,300 first mortgage, $900 HELOC interest only) and hope to retire soon, you are probably house rich and financial asset poor. That’s certainly what having borrowed against your life insurance and 401(k) plan tells me.
Put it this way, houses are consuming assets. They provide valuable shelter services, but even if you have no mortgage, they cost a lot to support. To support an unmortgaged $1 million house in the style to which it is accustomed, you would very likely need about $50,000 a year in after-tax investment income for operating expenses. This includes a steady amount to be reserved for repairs and replacements. That, in turn, implies a fund of at least $1.3 million.
Very few people have $1.3 million in their 401(k) accounts. More important, there is more to living than keeping a roof over your head.
On the other hand, if you sell the house and pay no more than your net equity for its replacement, you’ll have made retirement a lot easier. Don’t feel bad about this: Millions of others did the same thing, if only on a smaller scale.
Q. What are your views on the appropriate amount to be invested in stock versus other investments? I plan to retire in a year. My investment adviser feels that I have enough money for a comfortable retirement. He has limited me to a 10 percent exposure to stocks due to their risk. Instead, he has placed me in gold, foreign bonds, currencies, etc. I recently had a profile done by a major mutual fund firm, and they recommend a 50 percent exposure to stocks. —B.R., by email
A. Ten percent is a very low exposure to equities. Combined with the other portfolio choices, your portfolio is a very large bet on continuing financial disaster for our country. That makes it inherently speculative, rather than an investment portfolio. In an investment portfolio, you invest in asset classes that have identifiable earning power such as domestic and foreign fixed income, domestic and international equities, and REITs. You don't invest in assets that have no inherent earning power, such as gold and currencies. At best, gold and currencies could be called insurance policies against disaster.
Most research supports having a 50 percent to 75 percent equity allocation in a retirement portfolio expected to last 30 years.