Is this a wise decision or not? On the one hand having the house paid off is peace of mind and extra monthly cash flow. On the other hand I want to lock in a 15 or 30 yr loan at 3 - 4% and should be able to yield 4-5% over that figure. Was looking to borrow up to jumbo limit. Interested to hear what others do in this situation. Would be sick though if we had another 50% downturn in market. I want the 90's back!
Thoughts on taking out mortgage to invest in market?
- Thread starter Capital1Hawk
- Start date
Of course, it should follow that most of us cautioning the OP about timing ought to be selling ourselves right now, doesn't it? And no, I'm not selling... but that's because I am a buy & hold investor who just keeps buying more every couple of weeks. It works really well, and I've lived through two of the biggest bear markets this country's ever seen.
Your question is a classic case of theory vs. reality.
Certainly, in theory, it makes all kinds of sense to borrow money at under 4% for 30 years, when the return on equities over just about any similar period would be close to 10-11%. I do not believe there would be any 20-30 year periods over the last century in which you would not have come out ahead with this strategy.
In reality, this strategy is full of problems. First and foremost, it assumes that you will have the discipline and patience to not only hang in, but to keep investing during the market drops...even the big ones where it gets really, really scary. Bailing out at the bottom, and being too scared to get back in is probably the number one mistake made by individual investors.
Second, what would happen in at the same time of a market crash you lost a job and did not have sufficient income to pay the mortgage. Then you would be faced with the option of having to sell at a bottom, or losing your house.
Third, you have to decide just how valuable the peace of mind of owning your home free and clear is, versus the potential returns (and losses) that you could get in the market.
Certainly, in theory, it makes all kinds of sense to borrow money at under 4% for 30 years, when the return on equities over just about any similar period would be close to 10-11%. I do not believe there would be any 20-30 year periods over the last century in which you would not have come out ahead with this strategy.
In reality, this strategy is full of problems. First and foremost, it assumes that you will have the discipline and patience to not only hang in, but to keep investing during the market drops...even the big ones where it gets really, really scary. Bailing out at the bottom, and being too scared to get back in is probably the number one mistake made by individual investors.
Second, what would happen in at the same time of a market crash you lost a job and did not have sufficient income to pay the mortgage. Then you would be faced with the option of having to sell at a bottom, or losing your house.
Third, you have to decide just how valuable the peace of mind of owning your home free and clear is, versus the potential returns (and losses) that you could get in the market.
Plus, OP could simply calculate what his monthly mortgage payment would be and, since he has the house free and clear, start making a payment to an investment fund every month. Plenty of opportunity for disciplined growth without the downside potential of losing the house.
Yes, he did. Actually, that is not out of line for long term returns on the broad equity market. Problem is, it does not move in a steady, straight line.
Currently doing this already. However I am looking to add to this return. I am well aware of the foreigners selling off right now so would not deploy everything today. Like coffhawk mentioned if you look at history for each decade of s&p and djia the returns are well above 3% average. I would have other assets and should have steady income to ride out a downturn and 20 yrs out from a normal retirement age. Won't like paying aca tax and having mtg interest deduction phased out but theoretically I should come out ahead. Just checking to see if there are any other missing items. Not like I'll be trading commodities or currencies with funds. Appreciate insight provided. The more I think about it the more it makes sense.
Would you be taking enough to itemize deductions. Assuming you don't now. It might offset some of the capital gains. I woudnt do it myself and I'm pretty risky.
Well, if he takes a mortgage, he would certainly get that deduction, which would lower the cost of the mortgage. With respect to capital gains, he would only have those if he sells his gains, which is not a very good strategy. Like I wrote in my first post, this strategy should work, so long as one has the discipline to do it right.
Question isn't whether it's a wise decision. Question is whether it's a colossally moronic decision or a manifestly idiotic decision.
Not necessarily. I can't imagine the op would be taking out a large enough mortgage to itemize if he wasn't already.
Edit. Nevermind he said he wants to borrow up to the line jumbo limit. Good luck with this.
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Ok, so a supplement to the OP's question. We are now making minimum plus a little on our mortgage and investing a substantial amount. I could use the extra I invest to pay off the house much earlier. By the advice given in this thread, shouldn't I be paying off the house instead of saving for retirement. FWIW, there is no match from my employer.
The house will eventually be paid off even if you just pay the minimum. Compound interest is your friend when it comes to retirement.
Financial advice is so specific to the circumstances that it's hard to give advice. Kids, cc debt, school debt, car loans, retirement, income/job stability, emergency fund, etc. are all factors. Yours is a little different than OP cuz his is already paid off, while yours isn't.
One way to look at it is expected return. Take your mortgage rate * (1 - tax rate) to get adjusted rate (eg 5% * [1-25%]=3.75% . If you don't think you can beat that, then pay more on mortgage; if you think you can beat that, invest it elsewhere. This is a very simple view.
Some people just don't like debt so they pay off mortgage even if it doesn't make sense by the numbers. The ultimate decision may come down to what you're comfortable with.
Really, a lower rate (after tax) than a mortgage? I'm not going to ever use margin debt for my personal investments, but seriously is it lower rates??? I don't believe this to be true...
I agree. One thing I would add is, in the event you lose your job, you are going to be a lot more likely to be able to make those monthly mortgage payments until you find work again if you didn't pay down the mortgage and just invest your savings instead. That, plus the fact that I think the stock market will go up more than 3.75%, is why I put my extra savings in the stock market instead of paying ahead on my mortgage.
my margin rate is libor + 1.5% but i guess looking around that is well below what most places charge. i had no idea i was getting such a good deal....
Whoa! The OP isn't talking about saving for retirement. The OP is talking about speculating in stocks.
You have to factor in the cost of risk, though. The historical numbers here say you'll come out ahead if you're disciplined, but there's still risk. You'll have to hold through the rough times on the market and continue investing to come out ahead. If you lose income while the market is down, the house could be at risk.
I'm not saying to run scared from risk, just that you have to have more than just the theoretical 7-10% return on the market vs. 3% interest factored into the equation. As it stands now, your house is safe and you don't have any mortgage/rent costs. That's a pretty sweet place to be and it has value.
Why do you think he is "speculating"? If he is investing in a broad, diversified portfolio for the long run with these funds, why isn't that a good retirement investing strategy?
As I posted above, I do not necessarily agree with the decision to take out a mortgage to invest in the market, for the reasons I listed. But it does not equate to speculation.
So you are the one who will correctly time the market. Good luck with that. What will you do if you miss another 5-10% run up over those next 6 months? Stay out? When and what will be the next bottom? Please let us know.
To me, "invest in market" means speculate.....although many people who do it don't understand they are speculating. Bottom line: He's borrowing money that he will put in a place that is not certain to return any profit or even maintain value. Are there places he can put it that will minimize the chance of losing? Of course. There's a big gap between buying T-bills and putting money into Uncle Fred's flux capacitor factory. But generally speaking, borrowing money to gamble --which is what he is proposing -- is a fool's errand.
Well, your view of investing is extreme. A well diversified portfolio and a disciplined investment strategy is nothing close to speculation. Historical evidence proves this beyond any doubt.
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