"prepay" property tax with STRIPS or TIPS

[blortchplop]

My mortgage is paid off. It bothers me a little that I still have to pay property tax and insurance on my home so I am considering "prepaying" these expenses by buying STRIPS or TIPS on the secondary market that mature prior to each payment in future years (one bond per year). Basically using bonds as sinking funds for future estimated expenses.

Is this a dumb idea?

While I fully admit that money is fungible, the idea or mental accounting of having my property tax and insurance "prepaid" for a number of years still appeals. The biggest downside is the opportunity cost of locking up present day dollars for this purpose instead of investing them in the market.

[anoop]

At least where I am, house insurance rates are going up far faster than any fixed income investment including TIPS. From mid 2019 to mid 2024, TIPS went up 20%, but my house insurance went up almost 100%. There's no telling how high it will go because recently my house is in what is considered "moderate risk" for getting impacted by wild fires.

Does your house tax depend on its price or is the increase capped like in CA? If it's not capped, then not sure how you can accurately plan for price moves as those too have outstripped TIPS in my area.

Then there's also taxes on TIPS. (I'm not familiar with STRIPS.)

Finally, are you sure you are going to be living there for as long as you plan to prepay?

[TheGreyingDuke]

As with TIPS, STRIPS are taxed on imputed interest that you don't actually receive until maturity

[ScubaHogg]

Those are just one expense amongst many. There is no reason to break them out specifically. It's just mental accounting.

Get your risk tolerance/AA right and the rest falls into place.

[GuySmiley]

Is this a dumb idea?

I hope not, because I do the same.

[RyeBourbon]

Is this a dumb idea?

I hope not, because I do the same.

I have STRIPS ladder for the next 25 years to pay my mortgage. It's in my IRA. The mortgage is a fixed expense, so a STRIPS ladder is appropriate. For property tax, I would use TIPS even though it could increase faster than inflation, since it's pretty much guaranteed to go up.

[blortchplop]

At least where I am, house insurance rates are going up far faster than any fixed income investment including TIPS. From mid 2019 to mid 2024, TIPS went up 20%, but my house insurance went up almost 100%. There's no telling how high it will go because recently my house is in what is considered "moderate risk" for getting impacted by wild fires.

Last 3 years have had year over year increases of 15.5%, 11.5%, and 17.4% for insurance. I'm not in an area prone to natural disasters.

Does your house tax depend on its price or is the increase capped like in CA? If it's not capped, then not sure how you can accurately plan for price moves as those too have outstripped TIPS in my area.

No cap, but it's averaged 2.65% cumulative over the last 7 years. An occasional jump every 4 years or so, then dithers around a little.

Then there's also taxes on TIPS. (I'm not familiar with STRIPS.)

STRIPS have a tax on OID income, which is similar to the tax on the TIPS inflation adjustment. STRIPS are just zero coupon treasuries, so no reinvestment risk.

Finally, are you sure you are going to be living there for as long as you plan to prepay?

I don't have any plans to move (family in the area), but who knows. The bonds would still mature on the same dates, and I could do something else with the money.

Those are just one expense amongst many. There is no reason to break them out specifically. It's just mental accounting.

Get your risk tolerance/AA right and the rest falls into place.

This is the rational answer.

Is this a dumb idea?

I hope not, because I do the same.

Glad to hear I'm not alone in at least thinking about this. There's something about ongoing costs to live in a place unrelated to actual consumption (utilities, etc.) that nags me...

I have STRIPS ladder for the next 25 years to pay my mortgage. It's in my IRA. The mortgage is a fixed expense, so a STRIPS ladder is appropriate. For property tax, I would use TIPS even though it could increase faster than inflation, since it's pretty much guaranteed to go up.

Oddly enough, my property tax seems to increase at a lower rate than inflation. I modelled the growth of both the property tax and insurance cost and was considering buying STRIPS in increasingly large face values to account for the rising cost. But your point is still valid about these expenses likely being tied to inflation in some sense.

I think the argument about money being fungible wins out here. Current plan is to increase my emergency fund a bit, then maybe start investing in equities in taxable.

[mchampse]

If it makes you feel better, by all means do it. It’s not going to throw your asset-allocation out of whack or anything like that.

Another option is to put money into a savings account every month and pay off insurance and property tax when they become due.

[Thesaints]

Is this a dumb idea?

It depends. Do you do the same with your insurance, car registration, etc ?

While I fully admit that money is fungible…

…you behave as if you don’t really believe it.

The biggest downside is the opportunity cost of locking up present day dollars for this purpose instead of investing them in the market.

Chicken dinner !!!

[blortchplop]

While I fully admit that money is fungible…

…you behave as if you don’t really believe it.

Haven't done it yet. Writing this down was helpful for thinking it through. Probably going to buy some I bonds and invest a little in equities in taxable.

[blortchplop]

If it makes you feel better, by all means do it. It’s not going to throw your asset-allocation out of whack or anything like that.

Another option is to put money into a savings account every month and pay off insurance and property tax when they become due.

Yeah, fair enough. Last year, I was putting any extra dollar into an MMF to get my emergency fund in a good place. Would be a good idea to set aside enough each paycheck to cover this so I'm not dipping into that and later repleneshing.

Thought was to extend that concept out to multiple years, but I think it's a lot of work for no actual benefit, haha.