The Problem Mortgage
“George” and his wife had purchased a home in Bend near the top of the market. Although we were managing George’s funds, we discovered on a routine visit to review their investments that the mortgage they had employed was an Option ARM, and they had not always paid enough to meet the principal reduction requirements. Yikes! After telling George that we’d be more than willing to review his mortgage or any other financial question before he made a commitment to a particular product, we reviewed the loan documents and, with two years to go before the first adjustment date, began preparing for a potential payment increase. We rejected the idea of refinancing into a fixed rate, as that would have required George to draw a substantial sum from his IRA both to reduce his loan balance to match the lower home value, and to pay the taxes associated with taking any funds from an IRA. Instead, as the stock market recovered, we slowly moved their accounts out of stocks and into relatively high yield short term corporate bonds, which would mature on the mortgage rate adjustment dates. By investing in high-yield short-term corporate bonds we had confidence that George would have a set amount in case he needed it to keep his house. At the first adjustment in May of 2011, the mortgage rate actually fell. In the meantime, George’s account grew and still retained a conservative element just in case there was trouble with the mortgage in the near future.