For months I have been debating paying off my recently re-financed 15-year mortgage so that I could just be done with it. However, with interest rates at all-time lows, why would I do that? It makes no sense, and in fact, if I was smart/emotionless perhaps I should reverse course and stretch my mortgage back to 30 years!
Here are the pros and cons of each strategy as I see it:
Should I Pay Off My Mortgage? The Pros and Cons
Pros of paying off my mortgage:
-The thought of being done with a mortgage would bring me great peace of mind.
-Savings of approximately $600 a month in interest
-No risk of losing this money in the stock market
Cons of paying off my mortgage:
-I would “lose” the optionality/flexibility to do what I want with the cash.
-Interest rates are at an all-time low, and this is an opportunity of a lifetime to borrow cheaply.
-Loss of mortgage interest deduction.
-And if I can’t beat my interest rate of 2.25% via trading, I should be shot.
OK, being shot is a slight exaggeration, but you get the point. Having made 50% or MUCH more for my Cabot Options Trader subscribers for years, taking my chances of beating 2.25% seems like a no-brainer. This leads me to believe I should keep my mortgage as is, and continue to invest heavily in my trading.
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That being said, there is no doubt that if I continue to invest heavily in my trading, there are risks. While the start of 2021 was incredibly strong for my trade ideas and call buying, the last couple of months have been a choppy mess as the market takes one step forward, and two steps back. This sloppy environment is not ideal for call/put buys, so there is risk.
This leads me to another way to beat my 2.25% interest rate, and that is a covered call strategy.
How to Use Covered Calls to Boost Your Profits
A covered call is a strategy that consists of owning an underlying stock and selling an option against the stock. Since a call option represents 100 shares of the underlying stock, you can sell one call against each 100 shares of stock you own. Because you own the stock, your short call position is “covered” by the stock.
A short option position by itself (without the stock) is very risky, and requires a substantial margin balance. A short call on a stock you own, on the other hand, is a very conservative strategy that requires no margin.
I would recommend a covered call options strategy against virtually any stock an investor holds. In my mind, it’s free money, and best of all, it’s a great way to start learning about options and options trading.
So how could I execute a covered call strategy on a stock to beat that aforementioned 2.25% interest rate? Let’s take a look at slow and steady stock Cisco Systems (CSCO), which is currently trading at 55.
If I were to buy 100 shares of CSCO at 55, I could then sell 1 of the CSCO January 60 Calls (exp. 2023) for $3.50. This $3.50 is actually $350, which goes into my account.
And if CSCO were to trade at 55 for the next year, the call that I sold would expire worthless, and I would have created a yield of 6.79%.
Taking this a step further, if CSCO were to rally to 60 or above, I would have a profit of $500 on my stock holding, plus the $350, or a yield of 16.5% in one year’s time.
This is the exact strategy we use at Cabot Profit Booster, where we sell covered calls on Mike Cintolo’s weekly Cabot Top Ten Trader stock picks, which are 10 of the week’s strongest momentum stocks. We are looking to buy the best-looking stocks, as chosen by Mike, and then sell covered calls against those stocks to rack up yields ranging from 3% to 20% month after month.
If those sound like the kinds of monthly returns you’d be interested in – or if you simply want to learn more about covered calls or options trading in general – click here to become a Cabot Profit Booster subscriber.
Stepping back to my mortgage debate … I can see the upside and downside to paying off the mortgage today. That being said, given the returns I could create in the stock market, I am going to stay the course, pay off my mortgage every month, and continue to grow my investing accounts.
What do you think? Should I pay off my mortgage, extend to a 30-year mortgage, or do what I just suggested? I would love to hear your thoughts on this subject. Leave a comment below!
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