Author Topic: Creating a Bond Ladder to Offset Mortgage Payments  (Read 2444 times)

Zee

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Creating a Bond Ladder to Offset Mortgage Payments
« on: February 27, 2014, 08:44:03 AM »
I recently came across the following thread which contained an alternative option to the standard prepay mortgage vs invest in equities discussion.

http://www.mrmoneymustache.com/forum/share-your-badassity/real-cost-of-paying-off-mortgage/

In essence, one poster suggested building a bond ladder (specifically zero coupon Treasury bonds) to match mortgage payments.  The goal is to arbitrage interest rates with more liquidity - after tax yields on the bond ladder would be higher than the after tax mortgage interest rate.  The bonds would mature overtime with the goal of offsetting the mortgage payment.  The strategy is of similar risk to prepaying mortgage vs investing in equities.  Additional benefits may come from tax deductibility of the Treasuries in certain states. 

With that said, how is this done?
 
For example, I have a $153K balance, 3.25% interest rate, and P&I of $1,496.68.  (Refinanced to a 15-year in January 2012 at $213K, prepaid down to $153K current balance).  Effective term would be approximately 10 years remaining if I no longer prepay and submit the minimum P&I payments of $1496.68.

I don't have $153K in cash to use to build this ladder, and honestly, I don't think that is what is needed to start. 

I would appreciate any insight on the mechanics of building this ladder.  Would one buy straight from the US Treasury or can other bond funds be used (i.e. Vanguard Short-. Intermediate-, or Long-Term Treasury fund or or Government fund)?  What is the % composition of short-, intermediate, and long-term funds in the ladder?  Are there other factors that need to be considered such as duration, etc?

Perhaps my example could assist others and be used as a template. 

Thanks.

KingCoin

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Re: Creating a Bond Ladder to Offset Mortgage Payments
« Reply #1 on: February 27, 2014, 03:10:18 PM »
The goal is to arbitrage interest rates with more liquidity - after tax yields on the bond ladder would be higher than the after tax mortgage interest rate. 2.6%

With short dated bond rates close to 0%, and 10y bonds at 2.6%, I can't imagine that there's an arbitrage there. You're almost certainly better off just paying down the mortgage.

Left

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Re: Creating a Bond Ladder to Offset Mortgage Payments
« Reply #2 on: February 27, 2014, 06:25:20 PM »
only thing I could think of are EE bonds that double in value over 20 years... but I don't think that would help on a 15 year mortgage...
So if after 20 years, your mortgage costs are covered by EE bonds since you could buy them now at half the price. But realistically, you could come out ahead investing the amount in index funds too then after 20 years, take out 4% on the "mortgage investment" and have a continuous return once house is paid off