Personal Finance Q & A

Sell Stock Or Borrow To Pay For Home?

Q I am considering paying cash for a new home. I figure I will pay less, despite capital-gains taxes, by cashing in stock of $150,000 than if I were to take out a 15-year loan and pay the interest over that length of time. I will also avoid bank fees. Seem reasonable?

- M.B., East Lansing, Mich.

A "You might want to consider cashing in only some of your stock and taking out a smaller mortgage," says Gary Schatsky, a fee-only financial planner in New York. "If in fact the only cost was the capital-gains tax, you would be correct that the tax would be less than the cost of mortgage interest payments and fees over a 15 year period," Mr. Schatsky says.

"However, that's not the only cost," he explains. "You would be giving up the opportunity to participate in future stock gains." Historically, stocks have gained about 10 percent a year, much higher than the interest rate you would pay on a mortgage, especially after the home-interest tax deduction. Of course, the stock market poses risks, he notes.

Q Our 40-year-old daughter has a proposal for a retirement annuity from a major US insurance company. She would make an initial payment of $2,000 and monthly payments of $300 until she is 65. Cash value: $325,317; surrender value: $325,317; death benefit: $475,317. Would she do better in a mutual fund?

- E.J. (e-mail)

A You are right, says Paul Pettersen, an accountant and financial planner at L.J. Altfest & Co. in New York. He assumes the money can be partially sheltered from taxes, such as in an individual retirement account or a variable annuity (an insurance policy that allows the individual to pick investments). Market returns are unpredictable, but "in terms of total return, your daughter could probably do better by taking out an annuity linked to a low-cost, no-load or low-load mutual fund," he says.

Vanguard Group (800-522-5555) offers access to both stock and bond funds, including index funds, in annuities. There is a $5,000 minimum investment. Monthly payments can be as low as $50, directly from a checking account, or $250 if you write a check. And the monthly payment can be stopped at any time without penalty. Another option is Fidelity Investments (800-544-2442). These annuities charge small annual fees on top of fund expenses, so shop around.

Questions about finances? Write:

Guy Halverson

The Christian Science Monitor

500 Fifth Ave., Suite 1845

New York, NY 10110


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