In 2008, the (long term) capital gains rates dropped. If you are in the 10% or 15% marginal bracket, your capital gain rate drops from 5% in 2007 to 0% (yes, zero!) from 2008-2010. For those in the 25% bracket or higher, the rate remains 15%. In 2011, these rates revert back to the pre-2003 levels of 10%/20%. See the charts at Fairmark to understand what bracket you fall into. As always, one should not let the tax tail wag the investing dog, it’s just good to know how these laws impact your investments. If this advice sounds familiar, I first suggested this back in January. Between the growth in readership I’ve enjoyed since then (up fivefold) and the risk this benefit may be short lived, I thought it worth repeating.
JOE
If you have not yet done so, please read part 1, part 2, part 3, part 4, part 5, part 6, part 7, part 8, and part 9 of this series first, then read on.
I received a number of emails after part 5 where I mentioned the HELOC use, but didn’t explain what MMAs claims are regarding this process. So let’s review the claims of the MMA agents.
While an honest agent will acknowledge that the prepayment of principal mostly comes from the paychecks of the home owner, many have managed to exaggerate the saving due to HELOC use and suggest that one can’t do this on their own. In the classic example, the client has $5000 worth of income, and $4000 in expenses. You’d imagine that during the course of an average month the client will see that their (0%) average monthly balance is as much as $3000, even though they may end the month with little sitting in checking. So what MMA claims to do is to borrow the difference ($2000) from the HELOC, depositing $5000 toward mortgage principal, and borrowing back from the HELOC as expenses arise. In theory, if the HELOC rate were the same at the interest rate on one’s mortgage, this strategy would create a rate of return on that average $3000 equal to the rate on the mortgage. But as I reviewed in my part 5 in this series, even if we assume the entire month’s income is available the whole month, the best we’d see from the HELOC use is $5000 x 6%, or about $300 per year. If we fall back to the $3000 average balance, the savings is just $180/yr. Not bad, right? But when we take the cost of MMA ($3500) and pay it off over the 10.4 year example, we find the annual expense to be $453/yr. For MMA to just break even would require an average checking balance (which for some odd reason is earning 0%) of $7,550. This would imply a monthly net income closer to $10,000 at a minimum. Nowhere else are these numbers discussed or disclosed. The latest version of MMA (V4) does take the claims to a higher level. The new software assumes another month’s float from the client using a credit card to charge every expense for the month, and use that float to pay toward the mortgage. Don’t fall for that either.
The agents promoting MMA manage to combine their own lack of understanding with a series of outrageous claims and take advantage of the average Joe not understanding how compound interest works. So far, in this series I have shown you the maximum amount you can possibly ring out of your ‘idle’ cash, and have shown how it’s a tiny fraction (a thousand dollars, if that much, vs the $164,000 in interest one can save) of the savings simply created by prepaying your mortgage with that same $1000/mo free cash flow.
Joe
Nassim Nicholas Taleb, author of The Black Swan and Fooled by Randomness was interviewed last week on CNBC, and as the author of two books I thought worth reading, the interview was one I wanted to share with my readers. I did the video capture myself and posted to You Tube. Enjoy
Joe
A press release I’d like to share with you today:
Boston – Laurence D. Fitzmaurice proudly announces that, effective November 11, 2008, the New England Shelter for Homeless Veterans will be known as the New England Center for Homeless Veterans. “This change reflects the ongoing evolution of the Shelter into a Center for the effective transition of formerly homeless Veterans back to the greater community as self sufficient individuals,” Fitzmaurice said.
A wonderful organization, and appropriate to consider on this day.
Joe
I recently heard your interview on Studio 360 and invite my readers to do the same.
When asked what an Obama win would mean to you, you replied it would be like your birthday, Christmas, Hanukkah, and Kwanzaa, all wrapped into one. So I wish you a Happy Everything this week. One point, though, you felt it would be close. Far from it. I wonder what you missed. It seems a strong combination of the country’s desire to get the current party out as well as the message of unity that Obama offered was enough to make the numbers short of a landslide. I understand the scepticism, but I’ve come to believe times have changed, and that’s not a bad thing.
Keep making those films, I look forward to every one you write.
Joe