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Old 04-27-2009, 03:10 PM   #81
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As of 1 April, this thread's 54th month, the mortgage idea isn't looking so good. The share price was $39.84 that day and the investment is down 23% from the mortgage's original balance. It's still down over 18% from the mortgage's current balance. Even after taxes and with reinvested dividends, the share price would have to rise back above $52 to break even. When this thread was started in Oct 04, the share price was $110 but IJS later split 2:1. So the reinvested dividends haven't done much for compounding yet.

The "good" news is that we restarted our mortgage last month at 4.5% to pay off in 2039. Another piece of "good" news is that we booked enough capital losses last fall (tax-loss swap selling) to avoid paying cap gains taxes for at least a decade.

However for the purposes of this thread, the original after-tax return to beat is 5.5% in Oct 2034. Lots of catching up to do.
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Old 04-28-2009, 05:12 AM   #82
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Nords - thanks for the update (read accountability) and transparency - very interesting information and a unique way to approach things - I know you are still enjoying checking out and taking advantage of the surf, though ;-)
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Old 04-28-2009, 11:29 AM   #83
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Nords

Just wondering if you mentally have a point where you may change your strategy or is this for the long haul?
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Old 04-28-2009, 01:50 PM   #84
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Hi Nords,

I've got to admit that I'm too gonadally challenged to risk borrowing against my home. I do salute you for your courage. I also think that ultimately your bet will pay off. The key to success does seem to be knowing your own risk tolerance.

Thanks for posting and keeping us up to date.

Larry
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Old 04-28-2009, 07:37 PM   #85
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I just refinanced my townhome at 4.9% 30 yr fixed (from a 5.75% 30 yr fixed). The only reason that rates are so low now is because the government is buying a boatload of mortages. My mortgage lender speculated that these rates will not be around next year.
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Old 04-28-2009, 07:48 PM   #86
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In effect, I did the same thing that Nords suggests, but instead of using a single distinct investment, I lumped that sum of money into my portfolio. At the time, my mortgage was about 60% of my home value.

Over the Six years into a 15 year term, my portfolio is up 7.4%. This is the IRR as reported by Quicken, so it takes into account additions/deletions to the portfolio. The mortgate interest is 4 7/8%.

However, I thought of repaying it when I started my ER (soon to be ex-ER), but didn't. From that date - 5/1/08, the portfolio is down 26%.

So, the jury is still out on whether I'll come out ahead or behind.
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Old 04-28-2009, 10:12 PM   #87
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Nords
Just wondering if you mentally have a point where you may change your strategy or is this for the long haul?
Nope. Long haul.

When we started in Oct 2004, the 5.5% mortgage payment was 72% of my military pension. A few COLAs later it's barely over 60%, and there's still a quarter-century of run time left. Despite this year's miserable losses, stocks have beaten inflation in every 20-year rolling period of at least the last century.

In real life we've also refinanced twice since then, so the latest mortgage payment is barely over 50% of my pension. And we got our rental home back from my parents-in-law in early 2007, so now that the rehabbing is just about finished the cash flow is starting to go positive. No bonds in our ER portfolio, so it has a statistically significant chance of beating the mortgage rate even after taxes.

Another thought to consider-- if inflation takes off a year or two from now, this game could be won just by investing the mortgage money in 30-year Treasuries. But that'd be a mighty tough arbitrage to pull off.
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Old 10-11-2009, 10:15 AM   #88
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Five-year update: a quick recap for those who don't want to read the entire thread. The mortgage money we borrowed at 5.5% and invested in 2004 was up over 17% by 2005. Even as recently as Oct 2008 it was still up 5.4% APY. This month, after a very “interesting” year, it's recovered from the negatives to achieve a five-year after-tax APY of 2.0%. Not very encouraging.

The “good” news is that the reinvested shares are now 6.5% of the total and value stocks tend to carry a higher risk premium. If this is the worst that can happen in 30 years then there still appears to be time for this investment to recover. The mortgage payments are being made from pension income and ideally we can avoid withdrawals from this part of the portfolio.

Our home mortgage itself was refinanced earlier this year at 4.5%, which means that its interest rate might even be lower than CD rates (let alone equity returns) in a few years. I was pretty sure that we wouldn't see lower rates than that during the rest of my life.

However Brewer's thread on PenFed's 5/5 ARM rates made me take yet another look at NFCU and our local banks. (We refinanced our home with a regional bank, Territorial Savings) On a whim I asked Territorial if they'd give us a competitive rate on refinancing the mortgage on our rental home. Sonovagun: for just 2.175 points they were willing to give us a 4.625% fixed-rate 30-year “investor” loan. Beats the heck out of the rental's 5.5% loan and drops our payments by nearly 19%. Better yet, the payback on the total closing costs will only be about 33 months.

I've been grumbling about being a landlord, but it could be worse. Every couple years we spend a week or two of sweat equity to change military tenants and do a little rehabbing, but the place is in great shape and we've had good tenants. I'm a tad concerned about our landlord luck reverting to the mean. But Hawaii real estate values have been dropping and probably won't recover for several years, so landlording is a good way to pass the time while waiting for the recovery.

As compelling as the refi math may be, a 33-month payback implies that we're going to keep the place for another three years. Spouse wondered if we should use the refi to take out more of our dead equity and invest the money elsewhere. [Cue the collective groan from the “pay off the mortgage or invest” crowd.] Hypothetically we could just leverage what we're already doing with our home.

Our rental's current mortgage is about 20% of the home's value and Territorial is willing to go up to 70% LTV, so I started crunching numbers. Our current rental cash-on-cash return (after mortgage payments, insurance, & taxes) is no better than 4.7%-- and that drops with every maintenance call. The refi would push that over 5.1%. That's pretty good for Hawaii but nothing like Mainland numbers. (Hawaii land is so expensive that it ties up a lot of capital.) On the other hand, even 4.7% is a lot better than current long-term CD rates. It makes a lot of sense to refi the mortgage balance to raise cash-on-cash return to 5.1%.

If we took out more cash from our dead equity, we'd be doing so at what are arguably the lowest interest rates in 45 years (and this time I really mean it). We could try to invest it in the stock market or we could chase a little less yield by putting it into a short-term bond fund. Or we could put the mortgage money into a long-term CD (say at 3.25%) and lose money for a few years (~1.25%/year) until CD rates rise with the Fed's efforts to combat the “inevitable” coming inflation. Hopefully that wouldn't take 30 years, but it could easily take four or five.

But the leverage is intimidating. If we raised the mortgage from 20% of the home's value to 70% then we'd have bigger mortgage payments eating into the rental cashflow. To get the rental's net cash-on-cash return back up to that 5.1% ratio, the invested money would have to be earning at least 6.4%. Yet the biggest CD rate we've seen in the last three years was 6.25%.

It's frustrating. Interest rates are cheap now and they're almost certainly going to go up... someday. It makes lots of sense to borrow cheap for 30 years and hope that interest rates will stay above the spread for a long time. But if we'd tried that logic starting around 2003-2004 then we'd still be waiting for interest rates to come back up.

I think we're leveraged enough. We're just going to refi the rental's existing mortgage without taking out any more cash, and keep on landlording for another three years.

Some of you may be wondering: “Hmmm. If they're loaning money at 4.625% to landlords, I wonder what their rates are for owner-occupied mortgages?” It turns out that the real inflection point on 30-year fixed-rate mortgages is 4.5%. Lower rates are available but the points are prohibitively expensive. I think we're done after this refi, and this time I really really mean it!
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Old 10-11-2009, 01:51 PM   #89
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As compelling as the refi math may be, a 33-month payback implies that we're going to keep the place for another three years. Spouse wondered if we should use the refi to take out more of our dead equity and invest the money elsewhere. [Cue the collective groan from the “pay off the mortgage or invest” crowd.] Hypothetically we could just leverage what we're already doing with our home.
After three years, if the mortgage is paid off, your net income from the rental property should increase, no? Or am I misreading you?

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But the leverage is intimidating. If we raised the mortgage from 20% of the home's value to 70% then we'd have bigger mortgage payments eating into the rental cashflow. To get the rental's net cash-on-cash return back up to that 5.1% ratio, the invested money would have to be earning at least 6.4%. Yet the biggest CD rate we've seen in the last three years was 6.25%.
Then the risk of negative cash flow rings warning bells for me.

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It's frustrating. Interest rates are cheap now and they're almost certainly going to go up... someday. It makes lots of sense to borrow cheap for 30 years and hope that interest rates will stay above the spread for a long time. But if we'd tried that logic starting around 2003-2004 then we'd still be waiting for interest rates to come back up.
Don't get greedy!

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I think we're leveraged enough. We're just going to refi the rental's existing mortgage without taking out any more cash, and keep on landlording for another three years.
I agree.
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Old 10-11-2009, 03:02 PM   #90
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After three years, if the mortgage is paid off, your net income from the rental property should increase, no? Or am I misreading you?
No, we're restarting the mortgage. I'll be 79 years old by the time this one is paid off.

The "payback" referred to is the amount of time it takes to make up for the refinancing expenses (points & closing costs). We're taking a bigger hit against this year's rent receipts in exchange for 30 years of lower payments.

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Don't get greedy!
Yup.
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Old 09-30-2010, 05:07 PM   #91
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Hard to believe it's been six years already. For those who don't want to re-read the entire thread, post #88 is a recap. But it's interesting to start at the beginning and reflect on how the board (and its posters) have changed over the years. To say nothing of the changes in the equities markets and the interest rates of mortgages & CDs.

Speaking of the recap, it's ironic that I said last year was our last refi, and that time I really really meant it. This month spouse and I are watching a 4% fixed 30-year homeowner mortgage being offered at 1.5-2 points. If it drops to one point then we're probably pulling the trigger, even if we haven't finished the payback from the last refi. Frankly the math works out in our favor even at 1.5 points, and I'll be 80 years old if we stop refinancing and actually let one go to its full amortization. So we're still debating.

But back to the numbers in the "pay off the mortgage or invest the money" debate. For purposes of the thread we'll assume that our home's mortgage is still 5.5% instead of its actual 4.5%. The small-cap value ETF, IJS, just coughed up its dividend to close out the sixth year. Assuming after-tax dividends are reinvested for free (as Fidelity does for our account), then the ETF investment's APY averaged over the last six years has risen to 3.27%. That's slightly more than a PenFed or NFCU five-year CD but less than their seven-year CDs. Of course if I'd signed up for one of those CDs in 2004 or 2007 then I'd have been earning more like 6% for my trouble.

We haven't been compensated for volatility either. Here are the APYs averaged over the first six years:
1: 17.1%
2: 13.3%
3: 13.5%
4: 5.3%
5: 2.0%
6: 3.27%

Speaking of volatility, it's also worth noting that the whole scheme went negative between late 2008 and mid-2009.

In the real world I've also discovered the profits of selling out-of-the-money covered-call options on a few hundred shares of the ETF. But that's more of a rebalancing issue than a significant method to juice the returns of the investment, and anyway it's a whole 'nother thread.

I'm not sure if I'm looking forward to the next 24 years being as interesting as the first six, but I'm sure they will be.
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Old 09-30-2010, 05:24 PM   #92
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Speaking of volatility, it's also worth noting that the whole scheme went negative between late 2008 and mid-2009.
Considering the volatility and less than expected, although still positive, returns, thus far, is this something that you'd do again?

An argument can be made for the "robustness" of the strategy given your positive returns, notwithstanding a less than stellar equity market. But a competing argument could be made regarding the return generated for the level of risk incurred.
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A question and a thought....
Old 09-30-2010, 05:35 PM   #93
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A question and a thought....

Hi,

Still about a year from retirement. Bought a home in the city (and sold my suburban home) late last year (figuring it would be much easier to get a mortgage before retiring.....and was pleased with a Jumbo conforming (Washington, DC) at 4.75%. I have the cash to pay off the mortgage, if necessary; and can under my loan have the mortgage "recast" once for a smaller amount (for a $250 fee), but figured rates could go up and I might as well keep a mortgage while my income was still relatively high. But I didn't even look at ARMS or Balloons (despite the fact that my previous mortgage for 20 years was an ARM that worked out very well (final rate: about 2.25% (1 year Treasury issues + 1.75%)

Then I spoke to a friend who just bought a new house and got an 11 year interest only balloon at $2.5% and I wondered. If you have the cash to pay off the propety if rates are high in 11 years, isn't this a great deal? It's about half the carrying cost of a conventional loan? Alternatively, what about a 5/1 ARM, currently costing 3.25% and capped at 5.25%?

Am I missing something here? (I guess the fact that if rates go up, I'd be making out like a bandit if I DIDN't have to pay off a balloon.....but otherwise....)

Thanks
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Old 09-30-2010, 07:37 PM   #94
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Considering the volatility and less than expected, although still positive, returns, thus far, is this something that you'd do again?
I'd do it as long as interest rates were declining (or at least reasonably expected to). This thread would have never happened if mortgage rates were north of 12%.

This is an arbitrage niche. The factors in my personal favor are a govt pension with a COLA, an aggressive portfolio with no bonds and mostly long-term CDs (had to cash in most of those CDs in 2008-9), our plans to age in this house as long as possible, and the large mortgage balance compared to low refi costs.

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Then I spoke to a friend who just bought a new house and got an 11 year interest only balloon at $2.5% and I wondered. If you have the cash to pay off the propety if rates are high in 11 years, isn't this a great deal? It's about half the carrying cost of a conventional loan? Alternatively, what about a 5/1 ARM, currently costing 3.25% and capped at 5.25%?
Am I missing something here? (I guess the fact that if rates go up, I'd be making out like a bandit if I DIDN't have to pay off a balloon.....but otherwise....)
That 11-year IO mortgage sounds almost too good to be true great, and lots of this board's posters have been chasing PenFed's 5/5 ARM. Do you have a link to that 11-year loan?

I'll let Brewer weigh in on the evolving business plans of mortgage financers, but I think they count on us doing frequent address changes. The more loans we pursue (whether by refis or moves) the more money they make. I think mortgage companies end up having to carry the occasional customer who scores a low-interest long-term loan and then arbitrages that against some other low-risk rate of return. They probably don't care as long as they can keep a high churn rate and lay off the risk (by reselling the loans).

The trick is making sure that you have the assets available to pay off the loan when the balloon comes due. But at that low rate you could stash the loan proceeds in a seven-year CD ladder and reap the harvest 11 years later.
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Old 10-04-2010, 02:11 PM   #95
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Don't have a link to the 11 year interest only....and it sounded suspiciously low to me too. My friend (more of an acquaintance really) comes from a VERY wealthy family, so it's possibly some kind of concessional rate or guaranteed by other assets....

But even so, a 5/1 ARM at 3.25% is still only about 2/3 the cost of my current 4.75% 30 year jumbo conforming! Is there any rule of thumb about when it's worth switching (particularly from a conventional to an ARM.....30 year conventional jumbo conformngs are currently around 4.5% and probably not worth the switch).

(whereas newcurrent 30 year jumbo conformings arre more
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Old 10-04-2010, 04:56 PM   #96
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But even so, a 5/1 ARM at 3.25% is still only about 2/3 the cost of my current 4.75% 30 year jumbo conforming! Is there any rule of thumb about when it's worth switching (particularly from a conventional to an ARM.....30 year conventional jumbo conformngs are currently around 4.5% and probably not worth the switch).
Not a clue.

Spouse and I are interested in staying put here for the next 20-30 years, and the mortgage arb is risky enough without adding interest-rate risk to that. It's a pretty straightforward bet for a small-cap value ETF to turn in ~6% APY over the next 30 years, but it's not so easy to compete against an ARM.

A friend is going to town with PenFed's 5/5 ARMs on his rental properties because he expects to pay down/pay off the mortgage before he could get hammered by rising rates.
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Old 10-04-2010, 07:39 PM   #97
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A friend is going to town with PenFed's 5/5 ARMs on his rental properties because he expects to pay down/pay off the mortgage before he could get hammered by rising rates.
I am doing the same with my primary residence and the 5/5 ARM, but the standard 5/1 is a far riskier product if you will still have a large balance when the rate readjusts.
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Old 04-16-2011, 09:50 PM   #98
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Semi-annual update: 6.5 years. Post #88 has the six-year summary.

On 31 March 2011 the S&P600 small-cap value ETF (IJS) closed at $76.22. That share price is only 4% away from the all-time high of $79.40 in June 2007. With reinvested (after-tax) dividends the total value (including unrealized capital gains) of the invested mortgage money is at a new high, exceeding the old peak of June 2007. Hmm. W2R, do you have any "Wheeee!" comments on current market valuations?

Including unrealized capital gains the before-tax APY has risen to 6.4%, handily beating the original 5.5% cost of the mortgage. After taxes, maybe not so much.

Late last year in real life, as reported in another thread (Whaddaya DO all day: PenFed mortgage refinance) we refi'd the mortgage yet again to 30 years fixed at 3.625%. It'll take four years to pay off the refi costs with our lower monthly payments, but it's a long-term winner. NFCU is now offering a 7-year CD at 3.40% APY (!) so we're almost at the point where we could arb the mortgage with a long-term CD ladder.

Disclosures & disclaimers: For those who are new to this thread, it's only an update. It's just 6.5 years into a 30-year experiment and it's too soon to call the results. This is a niche investment situation that's probably only appropriate for those who are going to stay in their home for 30 years (or the rest of their lives), living off a COLA pension while investing the mortgage money in a long-term equity index. Volatility would exceed the sleep-at-night comfort level of most rational humans, perhaps even Vulcans. A portfolio's 30-year survival is influenced by the first few years of returns, and in this case they were wonderful. I'd hate to consider this experiment starting at the 2007 peak, but someone else can feel free to run the data. However some FIRECalc data runs indicate that a larger portfolio (even with its higher expenses of the mortgage payment) is more survivable than a smaller one, so an ER mortgage may actually be a good idea in some scenarios. The credibility of your comments is directly related to the evidence that you've bothered to read the first 97 posts.
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Old 04-16-2011, 10:21 PM   #99
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On 31 March 2011 the S&P600 small-cap value ETF (IJS) closed at $76.22. That share price is only 4% away from the all-time high of $79.40 in June 2007. With reinvested (after-tax) dividends the total value (including unrealized capital gains) of the invested mortgage money is at a new high, exceeding the old peak of June 2007. Hmm. W2R, do you have any "Wheeee!" comments on current market valuations?
Who, me?

Probably shouldn't!

Instead of saying how happy I am lately, I'd better just say that I'm cautiously optimistic. Now I know why politicians talk that way....
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Old 04-17-2011, 07:04 AM   #100
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Nice thread! It motivated me to look at my retirement budget/withdrawal spreadsheet and look at paying off a new house at retirement (we'll be relocating). Wow, the numbers do look better. Getting that ~$1200/mo off the outgo really helps, even with the portfolio reduction.
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