Question: I currently have a 5/1 arm on my first mortgage locked in at 4 percent for another two and a half years (my balance is $111,000). I also have an equity line of credit that is near my limit of $60,000 at 7 percent and keeps rising, of course, with interest rates going up. I inherited my father's house when he died back in August of 2005, and I am in the process of selling the house. I should close in mid-February. Should I pay off the equity line of credit, or combine the two mortgages and invest the money I will be making on the sale of the house? I have to distribute some of the money to family, but I should be able to invest nearly $100,000. Thank you — Polston
Gary B. Smith: Polston, whenever people consider paying off their home, they have to also consider what alternative uses they have for that money. In addition, don't forget that whatever interest you're paying is tax-deductible, so even if mortgage rates rise, you'd still get the tax benefit. So, while there are a lot of variables — we don't know where interest rates will go, nor the stock market. My take would be to combine the two mortgages, lock in at the lowest rate possible, and invest the rest of the money. How you invest that money is, of course, up to you!
Question: Strictly for pleasure, we are considering the purchase of property in Italy. We would be financing it and are not intending to sell our home here in the States. With the price of the Euro being stronger than our dollar, would this be a sound decision? I am not sure if this would be a financial boondoggle, or if it would actually have some benefit (over and above the fun of having a place in Italy). Also, would it be better to finance it in Europe or here? — Richard (Pittsburgh, PA)
Gary B. Smith: Wow, Richard, you sure have a lot of "unknowable" here. For one, who knows where the price of the Euro will be compared to the dollar. Also, financing in Europe? That's probably a college semester in itself. With all that said, I think you hit the nail on the head when you said you are doing this for pleasure. In that case, I'd consider Italy your vacation home and finance it through your U.S. bank, just like you'd do if you were buying a vacation home in Allentown, PA!Question: Wendy (London, KY)
Gary B. Smith: Wendy, one of my favorites is an old chestnut: "One up in the Market," by the famous Peter Lynch (or at least famous to those who grew up with the Magellan Fund). Good reading and you'll get valuable insight about the market. After that, contact your broker and he can provide you with a short guide on "the lingo."
Question: How do you feel about Iraq dinars as an investment? Thanks — Carl (California)
Gary B. Smith: About like I do on buying lottery tickets. One has to win, but with so much uncertainty, it wouldn't be the place for my money.
Question: What do you think about the FairTax plan? Do you think it could pass in Congress? — David (Charlotte, NC)
Gary B. Smith: David, I think the FairTax plan — basically a national sales tax that would replace the national income tax — has a ton of merit. In fact, anything that results in getting rid of the income tax could would be a welcome relief. Will it pass Congress, though? Not in our lifetime, I'm afraid. There are just too many constituencies and too much invested for the current tax monstrosity to go away.