Personal Finance Q & A
Q We own notes and bonds issued by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac). The offering circulars enumerate "certain risk factors." Bold-face type says the issues "are not guaranteed by the United States," and "are not the obligations of any United States agency." My broker said the issues are AAA rated, and the issuers have the government's "moral backing." Should I sleep well at night?
- F.D., Laguna Hills, Calif.
A "Yes, you can sleep well," says Peter Perrotti, senior vice president and director of residential mortgage securities at Hartford Investment Management Company in Hartford, Conn. Originally chartered by Congress, Fannie Mae and Freddie Mac are publicly traded companies listed on the New York Stock Exchange. They issue "mortgage-backed securities" - bonds whose interest income comes from payers of home mortgages.
The two groups have substantial credit lines and "lots of political clout," says Mr. Perrotti. And the securities carry either "actual or implicit AAA ratings."
Q I have $20,000 in Strong Advantage fund, a short-term bond fund currently returning 6.31 percent. We are upgrading our kitchen to the tune of $20,000. We have a home equity line that we can tap at 7.3 percent. Assuming a 28 percent tax bracket, is it better to spend the cash or get a $20,000 loan, pay it off over five years, and enjoy a tax deduction?
- D.R., San Mateo, Calif.
A Good question. The two options appear very similar in cost, with some uncertainties (such as loan costs and whether the bond fund will keep returning 6.3 percent), says Tim Shmidl, a financial planner at Prism Financial Group in Overland Park, Kan.
"If you have a lot of liquidity [additional savings] beyond the $20,000, then take the cash from the ... fund and use that to upgrade the kitchen," he says.
"Be sure to pay yourself back [by saving] on a monthly basis, just as you would have done with the loan," Mr. Shmidl says. If you don't have extra cash, "take out the home equity loan. Make sure the contract has an early repayment clause" so that if you become strapped, you could take the money from the Strong fund and retire the loan early, he says.
