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Want an AAA+ Investment? Pay Off Your Mortgage? Last year rating agencies reduced the U.S. credit rating and now it is AA rather than AAA even though the U.S. government has the means to print money legally. Investors these days would rather hold on to their money than pay to keep it in the vaults. Investing in a 10- year Treasury bond with the present inflation rate of 2·3 % means losing more than 60 basic points or 0·60% which is not a winning proposition. This does not mean that a AA-rated bond is not a good investment because even BBB could be considered investment worthy. However the investors are looking for more than such small Treasury returns in order to compensate for the higher credit risk involved. The problem is that carefree investing is hard to find and there is no real substitute for AAA-rated government bonds to be found at the present time. Some investment-grade corporates can return nearly 8% over 10 years, but these are in the category of BBB and certainly not AAA. The best returns for AAA 10-year corporate are in the region of 2% which is a negative real return because the inflation rate is 2·3% as of April 2012.
Your home mortgage may be the best investment. Better than even the AAA-rated Treasuries in times past. The value of the credit rating you already have is possibly the best there is. Your mortgage is in fact an opportunity for investment with an exceptionally good credit rating so we are calling it AAA+. The only possible risk in repaying a debt is if there is a prepayment penalty, and we are assuming that this is not the case , so anyone with a mortgage is in control of their investment. This can be considered riskless as you don`t depend on the credit rating of the other party as you do when you invest in bonds. Mortgage rates are better than those of any other investment which means that your best investment is to call in your mortgage.
In the situation where the borrower has taken out a 30-year mortgage for $300,000 at 3·75% the principal and interest payment is $1,389 per month. The present balance on the loan is $250.000 and the borrower is in the 33% marginal tax bracket making $250,000 a year. The question is whether it is better to invest the lump sum or to pay off the mortgage?
First it is important to find an investment with a credit rating as good as the mortgage which we have given a AAA+ rating. There is nothing comparable but the best available would be a government guaranteed investment perhaps a Treasury bond. Calculating the after tax returns on a 10-year bond and comparing that with paying off the mortgage shows a 1·17% higher rate of return if you chose to repay the debt.
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