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How to Borrow Money at 4.875% and Fairly Conservatively Earn up to 12.0%

Opponents of proper equity management, as well as those who push mortgage acceleration programs, argue about the ability to earn even 6% tax-free in conservative investments. I will show you how spreading your horizons and investing in CDs based on World Currencies can do that and more, with fairly little risk if you know what you are doing.

I have talked a little about the Icelandic Krona and how a 3-month CD based on that currency is yielding over 12%. Since CDs are about as conservative an investment as they come, I doubt many would argue about using this as a tool to invest in. The major issue with using World Currencies are they are subject to the strength of the dollar, which right now gives them even more favor.

So, by now you have guessed that you can borrow money as a mortgage and receive tax deductions (subject to limitations) on that interest yielding a net cost of 4.35%, basing it on a 25% tax bracket. That tax bracket is probably on the low side and definitely will be in the future.

The question lies more in where you could invest your money instead. This is tricky as not all strategies and investments fit everyone and you will need the guidance of a financial advisor to find the best investments for you. That being said, let's get back on the subject of World Currencies.

Getting back to the Icelandic Krona, it currently yields 12.14% APY (11.73% on each 3-month CD) as of July 27, 2007. Chances are you will not yield that rate because the dollar is constantly changing value and thus your actual rate may be higher or lower than that yield. Therein lies the risk, which is based on the conversion rate of the dollar to the currency your CD is based on.

So, let's break it down into scenarios are how you can make the best (or worst) of this investment. Let's take a $20,000 investment ($10,000 is the minimum) and place it the Krona CD, letting it renew for the year (return equals 12.14%). Let's also say the exchange rate is currently 1.74 (the real rate is different right now).

Your $20,000 investment would grow to $22,428, right? Only partially correct. While the yield will generate that amount, you must factor in the exchange rate to see the real rate of return. So, if the dollar weakens against the Krona, then the exchange rate goes up and so does the rate of return. The opposite is true if the dollar strengthens.

So, let's use three scenarios. The first represents the dollar weakening, the second has the dollar basically the same and the last shows strength in the dollar...

	Weaker	Same	Stronger
Conversion Rate	1.80	1.75	1.65
Total Return	$23,201.38	$22,556.90	$21,267.93
Total % Return	16.01%	12.78%	6.34%
Net Gain	$3,201.38	$2,556.90	$1,267.93

So, if you get a weaker dollar scenario, you could be looking at a 12% after tax rate of return. Even if the dollar stays about the same, you would be looking at about 9.6% after tax. Also, you may be able to include these investments in a tax-free vehicle as well. I do not think anyone will argue that the dollar is currently trending lower, so chances lean towards Scenario 1 and Scenario 3 is not likely to occur for a while.

Other currencies are available and work in similar fashion, only yields are not as high. New Zealand's Dollar is currently showing a 6.79% APY and the South African Rand is clocking in at 7.71% APY. Both of these currencies are seeing weakening US dollar comparisons so the yields will be greater if the trend continues.

Once again, this post is to show that there are opportunities to relatively conservatively make more than 6% on your money and with mortgages remaining at low interest rates, focusing on investing instead of paying off your mortgage as fast as possible may be the better solution for you overall.

Posted by Florida's #1 Mortgage Planner on 07/27/2007 11:35 PM

Comments (13)

investing, equity management, mma, money merge account, mortgage acceleration, mortgage planning, florida mortgages

13 Comments on How to Borrow Money at 4.875% and Fairly Conservatively Earn up to 12.0%

JUL

2007

In my opinion the investments that you are talking about are money speculation and could hurt people if the exchange rate changes.

Is it wise to lock in an investment using the equity in your home? didn't the U.S. go through something like that in 1929?

James...Thanks for the comment. Two things I will point out and reiterate from the original post. One, exchange rates do have an effect on the actual rate of return (see the table for clarity). Two, not everyone should be doing this type of investment as it is not speculation if you know what you are doing.

It is no surprise our dollar is weakening compared to other countries. That trend will likely continue. Also, this investment is a 3-month CD, so it is short term (you can elect to continue if you want) and you can walk away fairly quickly if things change and the exchange rates go the other way on you. So, again, it is a fairly safe investment overall, unless Iceland declares Bankruptcy per se. I used it in this example as I am about to send money into this investment myself.

Is it wise to use the equity in your home to invest? That depends on you. Most of the wealthy in America do exactly that, so you decide. Secondly, 1929 had different rules that do not exist anymore. The rules are now much more in favor of the homeowner. I could go an about how "Great Depression Era" thinking is keeping people from making money, but that is best in another post.

JUL

2007

Thanks for the heads up. Caveat Emptor. Just one more investment option one should be aware of. When compared to CD's today it is a great investment option.

How do I get a uniform like that. You look so cool in it.

I will bookmark this one Robert, too tired/busy/need to get off the computer to digest at this point. I look forward to a lot of stuff you have to write and will practice it as I see fit. I'll return...

JUL

2007

Christopher...Thanks for stopping by. I like to provide other ideas on investments that I have not seen mentioned before, especially ones I would consider very good risk/reward type investments like these. There are some risks, but those risks can be minimized through proper research and the rewards on these can be very good.

Jason...I am glad you like the content I provide. I hope it helps others in their ability to assist their own clients as well. This is an investment I was fairly recently turned on to, so I have been doing alot of research on it before this post. I have even developed a simple Excel Spreadsheet that can be used to analyze the risks if the market goes up, down, or remains the same, so you can further check the exchange rate risk compared to the potential rewards to see if it is an investment worth doing for you.

Hi Robert,

I don't object per se to currency trading, I think however that the equity from your home should NOT be the money you use to play this game.

That said, I do think that you should max up your mortgages and invest that money in something to earn a spread. My preferences run to 2nd TDs and Land, both of which return double-digit interest.

Take your "poker" money to play the currency markets. if you win let it ride.

Bill Roberts

JUL

2007

Bill...Thanks for the continued discussion. As I said, this investment is not for everyone and the post was primarily to get people to realize how easy it is to make money. Also, rather than to "focus" on paying off a mortgage, it is better to "focus" on achieving other financial goals first. If you don't agree, that is fine.

I want people to be thinking, not just going with the flow. I also want them to be seeking qualified professionals that can provide options and a variety of solutions, then take their "suitability" factors and help them find the right solution. All too often, people simply focus on rate and fees and don't seek advice. That could end up costing them hundreds of thousands of dollars over time.

I like other investments better than these, but these can have their place if you know how to play the game. Alos, I don't consider any money "poker" money unless you just like to throw it away. I would not tell just any client to invest in this and I mentioned this investment is not for everyone, you do need to understand some basics about currencies. That being said, they are a good risk/reward ratio (in my opinion) if you know what you are doing.

Robert, we are on the same page re: paying off the mortgage. I think it is just plain foolish to have money "tied up" in equity (dead equity I might say) than invested for a return. Borrow low and lend higher is what banks do. We should all emulate them.

I've considered currencies before, but as yet have not jumped in. I would think that the "spot" market would allow for greater flexibility however. Just how fast can you get your money out of a foreigh currency CD?

Bill Roberts

Bill...Thanks for coming back. Foreign CDs can been as short as 3-months and the Icelandic CD I mention is that term. You can actually jump across the border to the south and get a year CD for 7.00% at Banco Azteca. Foreign CDs offer the benefits of US CDs, but do carry some added risk, that of the strength of the US Dollar versus the Foreign Currency your CD is based on. As I said, this can be minimized by doing research and their rates of return can be significantly higher in with a weakening US Dollar like we are seeing now.

Other investments I really like are high yielding stocks (dividends are taxed at 15% right now) and other investments one would normally contribute to, based on their sutiability and financial goals. Tax-Free Bonds are good as well, as is investment grade life insurance. I personally have most of these (I do not have tax-free bonds right now). I also like real estate investments, especially utilizing 1031 exchanges.

There are so moany ways to make money by leveraging. Its just that people need to learn how to do it and work with someone who can make it work for them. They also need to find those that can educate them properly.

AUG

2007

Hi Robert, I've been reading your posts ever since I joined AR (one month today) and it has been very edifying. I just went back and read your bio. It says you teach Financial Planning courses. Do you have an insurance license as well?

I am interested in financial planning and retirement planning but I do not want to be an insurance salesman. Any thoughts or suggestions would be appreciated.

Thank you.

Bill Roberts

Bill...Congrats on your first month and I am glad you have enjoyed my posts. As for the licenses, I have let them lapse as I do not use them, particularly since the licenses were when I lived in Virginia and I am now in Florida. Also, I decided to devote all of my efforts to the mortgage planning process alone for now, but I do have plans to create a "one stop shop" in the future. I held Series 6 and 63 Securities (all I needed at the time) and Life and Health Insurance licenses.

I do not teach "financial planning" per se, but rather mortgage planning to financial planners, tax advisors, CPAs and Realtors. I have 3 courses that are approved for CE credits for CFPs. Additional seminars are available based on needs/wants. I will be speaking at the Construction Expo in Tampa toward the end of September. I was asked to speak there on flipping home strategies and allowed to incorporate a mortgage as a tool seminar as well. I am working on development of these two seminars (catered specifically to the crowd expected) right now.

I would recommend getting license(s) in securities as you can learn a lot from them. They are hard exams, but with a little studying, you should do fine. As you talked about practicing equity management, it is good to know various financial planning aspects, including tax ramifications, retirement planning, estate planning, and some other areas.

AUG

2007

Robert, thanks for taking the time to fully answer my comments. I appreciate it. I have been considering taking the Masters program in Financial Planning at SDSU. The school is only one mile from my home and I believe that the program is highly respected. Your thoughts on this would also be appreciated. BTW I'm 64 years old. It's not like I'm at the beginning of my "career." Rather, it is that I am fully commited to "saving" the many Baby Boomers that failed to prepare themselves for retirement.

Bill Roberts

Bill...You are never to old to learn. One famous guy years ago decided to learn a new language despite being over 80 years old (the name escapes me right as does the particlar language). His response was something along the lines of "because it is all the time I have left."

Knowledge is a great thing and I encourage you to go take the course and make a difference in people's lives. Most Baby Boomers are not prepared for retirement and will need help.

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