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Better To Cut Mortgage Or Invest In Funds?
Staff - Mortgage Lenders Plus.com
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Q: I have a 30-year fixed mortgage at 5.25 percent. I am considering paying my principal down with an extra $500 a month, but am unsure whether it would be better to invest that same $500 every month in a mutual fund.
What do you think?
Kevin H., Sacramento, Calif.
A: That's a question even the experts disagree on. Here are the two trains of thought:
Pay it off: Reduce your debt load as soon as possible, which will open the door to retirement. Why waste the money you would spend on interest payments? The faster you pay off the loan, the more you save. It's better than money in the bank. You're betting on something you know, your house.
Invest the money: Take the $500 and put it in the stock market. You can make more money there than you will save in paying down your home loan. This is a golden opportunity to dollar-cost average your way into the market and to build up a tidy retirement portfolio.
Pay it off: Are you kidding? What if the market falls? Remember the sharp downturn in 2000-03? By paying off your mortgage, you're betting on a sure thing.
Invest the money: Are you kidding? Take a look at long-term market results. The market gains an average 10 to 12 percent a year, about double the 5.25 percent you'd be saving on your house. And if you pay off your mortgage, you're going to lose some of the tax write-off on the interest you pay.
Those are the two opposing viewpoints.
Sacramento financial planner Carol Van Bruggen takes a more neutral view. She agrees that "most people want to have no debts at retirement. They seek peace of mind and they know the value of owning their own home."
But she warns that everyone needs liquidity in their finances.
"You have to have cash or assets that you can quickly turn into cash in case of an emergency," she says.
When you're retired, you need to have at least six months of living expenses in a money market fund, she says.
"I think it's a good idea to pay off your mortgage early, but not if it keeps you from putting money into your retirement account or savings account where you have liquidity," she says.
Makes sense to me.
Q: I like to visit casinos occasionally and thought I would hedge my bets last year by buying Station Casinos stock at $48 a share.
Station has climbed nicely but seems to have peaked. I had thought it would be good for the long haul, but am now thinking it might be a good time to take my nice profit.
What is your feeling about the stock?
Ernie B., Sacramento
A: Station Casinos Inc. has been firing on all cylinders for some time and its shareholders have been well rewarded.
The company's strategy has been to build its casinos around Las Vegas, focusing on the local residents of the fast-growing city. In addition, it has contracted to manage several tribal casinos, including Thunder Valley in Lincoln, Calif.
On July 28, the company reported that its second-quarter earnings rose 40 percent to $40.6 million, or 58 cents a share, up from $29 million, or 43 cents a share, in the same quarter last year. Revenue rose 14 percent to $274 million.
The Las Vegas company told Wall Street that its profits for the rest of the year and 2006 will be slightly higher than forecast.
In another piece of good news for investors, Station increased its quarterly dividend 19 percent to 25 cents a share.
The company plans to spend $110 million to expand its Green Valley Ranch resort in Las Vegas. In addition, it may open a casino in Reno, Nev.
If you want to get a good picture of the company's stock (ticker symbol STN), check out its five-year performance on the New York Stock Exchange.
Back in September 2001, you could have snapped up Station shares for as low as $7.50 a share. Today, its shares are selling for nearly 10 times that amount. The stock closed Thursday at $69.71.
While you've already got a tidy profit in the stock, I'd be more inclined to hold rather than sell your shares unless you see a far better place for your money today.
Q: I am writing to request a recommendation for a glossary of the acronyms and abbreviations used in so many financial reports.
For example: gross profit margin. What is a margin anyway? And what is P/S (ttm) and revenue (ttm)? In fact, what is ttm?
- Leslie B., Sacramento
A: Let's start with the easy answers first.
The term "ttm" stands for trailing 12 months. So when you see something like revenue (ttm), that number reflects how much revenue the company took in over the previous 12 months.
When you have something like "P/S (ttm)," it simply means per share trailing twelve months, most commonly earnings per share over the prior 12 months.
If you want to look up a term like gross margin or operating margin, I'd suggest that you find a copy of Webster's New World Finance and Investment Dictionary. It has more than 3,500 entries and is a good place to look up terms.
Another book you might want to consider is the "Dictionary of Finance and Investment Terms" put out by Barron's. I've had that book on my desk for years, along with Barron's "Dictionary of Real Estate Terms."
If you would rather use the Internet, there are several sites, including: www.investopedia.com.
That's where you will find that "gross profit margin" is the difference between revenue and expenses and is one measure of a company's performance. It also notes that in a general business context, a "margin" is the difference between the selling price of a product or service and its cost of production.
(Distributed by Scripps-McClatchy Western Service, http://www.shns.com.)
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