Housing

[Jmo1969]

I live in my current place and it has no mortgage. My current housing needs to be a able to meet the needs of my family. Wife and 3 young children. I will need to downsize at some point. At my current level of investments my hose is approximately 60% of my net worth. The other 40% is 15% stocks 15% bonds and 10% cash Given mortgage rates are low, would anyone advise doing a cash out refi and diversifying my portfolio?

[aim-high]

Personally, I wouldn't do it for two reasons.

1. I've found the emotional return from owning my home is better than a few extra points in the market.

2. There aren't many places I can get a 4.5% risk free return.

[GrayHare]

I would, given in the years ahead I'm expecting inflation to meet or exceed its historical average around 3%. If you can get a mortgage for 4%, that means after inflation you are paying a mere 1%, and after tax credits perhaps near 0%. I've been able to generate more than a 1% return on my investments.

[Elbata]

Well, both aim high and GrayHare make great points.

I love having a fully paid off house. I haven't thought of a house payment for years, and hope that's the case the rest of my life. So yes, a hell of a piece of mind.

OTOH, GrayHare's logic is sound. Here's a middle ground: If the money is that important, get a roommate and have the best of both worlds.

[aim-high]

In a purely economic sense GrayHare's argument wins the day - even at current interest rates and counting closing costs. However, the decision of home ownership with a wife and 3 young ones is never purely economic.

JMO, what's your bride's opinion?

For mine the "security" of owning the home was worth far more than the potential return. We made that decision even when rates were a point less than the are now. Maybe if I could get a mortgage at 3% and put it in a savings account at 5% I might consider it, but even then . . . it's hard to counter the emotional freedom that we experienced with no debt and increased cash flow. Of course, not all get the same "return" from paying off their mortgage and Baskin Robins continues to serve 31 flavors.

Jmo, I'm curious - why are you considering this now but did not act on it when rates were 30% lower? How recently did you pay off your mortgage? How much freedom do you have in your cash flow without a mortgage and will one change that significantly?

Hypothetically, suppose my budget without a mortgage is $2,000 a month to the good that I can direct towards savings or anything else. Taking on a $1,700 monthly mortgage changes that a lot.

[Jmo1969]

Thanks for your input. I bought my place 18 months ago for cash. I couldn't do a cash out refi in FL for 6 months or a year given all the fraud that has happened in my area. I love not having to worry about the monthly mortgage payment yet I'm not sure if I'm being "smart" about.
I'm going to check a few muni funds. If I can get the same average return that should be a no brainier. (Any suggestions on muni funds?)

[Gatordoc50]

Personally, I don't like the idea of leveraging your home to invest in securities. But I don't know enough about your particulars such as income stability, net worth, etc, to give an opinion. It's going to be difficult to find a safe investment that will exceed your interest rate unless you match the duration with your mortgage term. And going out on the yield curve increases risk/ volatility. So, if you are set on doing a refi then I would recommend that you invest the funds according to your current AA and avoid long term bonds.

[Texas Proud]

You need to look this up.... this has been discussed many times and always without any final decision... why? Because there IS no final answer... This is an emotional decision no matter what the numbers say....


Let me show you using me as an example... I can easily pay off my mortgage... but I do not... I tell myself, 'there is no way you can give up 3% money.... you can earn more than that in the market'.....

BUT, I also did not take out any cash when I did refi.... I told myself 'don't be a fool and use your house as a margin account'....


Now, you cannot square these two statements.... they are opposite of each other.... but they both came out of my head.... and I listened to both of them....

[panacea]

Quote:

Originally Posted by Texas Proud You need to look this up.... this has been discussed many times and always without any final decision... why? Because there IS no final answer... This is an emotional decision no matter what the numbers say.... Let me show you using me as an example... I can easily pay off my mortgage... but I do not... I tell myself, 'there is no way you can give up 3% money.... you can earn more than that in the market'..... BUT, I also did not take out any cash when I did refi.... I told myself 'don't be a fool and use your house as a margin account'.... Now, you cannot square these two statements.... they are opposite of each other.... but they both came out of my head.... and I listened to both of them....

+1
If you do it and the market goes up you'll be glad you did (at least for a while) it but when we have the next market correction, it may drive you crazy. Given my tolerance for risk, I chose to refinance to the lowest rate (2.75% 15 year fixed) but then invest excess cash going forward in the markets versus paying ahead on the mortgage. When the mortgage is paid off, I won't go backwards. Personal decision.

[ERD50]

Quote:

Originally Posted by Jmo1969 ... I love not having to worry about the monthly mortgage payment yet I'm not sure if I'm being "smart" about. ...

I will just add that I think the 'worry factor' of the monthly mortgage payment or the 'comfort factor' of not having a mortgage payment is a mirage - probably even backwards.

Consider this scenario - you take out a reasonably sized mortgage (let's say 20% of total NW). Yes, you have a mort payment, but you also have gained a ton of liquidity. Now imagine you lose your job. You still have prop taxes, utilities, and food to put on the table. You can easily cover that mortgage payment from the liquidity for a long time.

Here's some round numbers from a calculator:

$100,000 mort @ 4% = $5736 P&I annually. So if you are out of work for a whole year, you draw down that $100,000 and you still have $94,264. You are likely to exceed that draw-down with investment returns long term. And you can tap it to feed your family if it comes to that. The money tied up in a house is not so useful in a case like this.

Liquidity is flexibility. Like any tool, use it properly.

Put another way - I'd be less comfortable being 'house rich and cash poor' than having some modest debt at good rates, and some added liquidity. Just some things for you to consider.

-ERD50

[Fishingmn]

We had a fully paid off house but when we moved 2 years ago and downsized we actually took out a mortgage (15 years at 3%).

I then used that money to buy additional rental properties with cash which are netting about 9% cash on cash return. I think it's a no brainer in that sort of situation if you can lock in an investment like that but I'd be a bit more leery of just putting it in the stock market.

[Texas Proud]

Quote:

Originally Posted by ERD50 I will just add that I think the 'worry factor' of the monthly mortgage payment or the 'comfort factor' of not having a mortgage payment is a mirage - probably even backwards. Consider this scenario - you take out a reasonably sized mortgage (let's say 20% of total NW). Yes, you have a mort payment, but you also have gained a ton of liquidity. Now imagine you lose your job. You still have prop taxes, utilities, and food to put on the table. You can easily cover that mortgage payment from the liquidity for a long time. Here's some round numbers from a calculator: $100,000 mort @ 4% = $5736 P&I annually. So if you are out of work for a whole year, you draw down that $100,000 and you still have $94,264. You are likely to exceed that draw-down with investment returns long term. And you can tap it to feed your family if it comes to that. The money tied up in a house is not so useful in a case like this. Liquidity is flexibility. Like any tool, use it properly. Put another way - I'd be less comfortable being 'house rich and cash poor' than having some modest debt at good rates, and some added liquidity. Just some things for you to consider. -ERD50

Who said you had to be cash poor in this decision


Sure, if you are cash poor... it makes a difference in a decision.... but I would have made a different decision in which house I bought so I would not be house rich.... (which, BTW I did when I bought my first house)...

[ERD50]

Quote:

Originally Posted by Texas Proud Who said you had to be cash poor in this decision Sure, if you are cash poor... it makes a difference in a decision.... but I would have made a different decision in which house I bought so I would not be house rich.... (which, BTW I did when I bought my first house)...

No one said you 'had to be' cash poor in this decision, I only said "I'd be less comfortable being 'house rich and cash poor' ...", I didn't mean to imply that would always be the case. It's a matter of degrees, but you will always have more liquidity with a mortgage than w/o - all else being equal and assuming the money is invested in something reasonably liquid (and not spent on consumables). If you have 'enough' liquidity with or w/o, then it's not a big issue.

But either way, the extra cash that you get with the mortgage will pay many years of those mortgage payments plus other necessities if you hit a bad patch. So my point is that having reasonable mortgage payments on a reasonable house should not create a lot of 'worry', compared to paying the mortgage off. And there are still plenty of bills (worry), even w/o a mortgage.

-ERD50