I'm getting a home loan

[dm]

I paid off my home in 2005, I was paying around 6% at the time. But now with rates in the 3.5% range for a 30 year loan, I went ahead and applied.

I don't need the money, not even sure what I'll do with it. I just don't think that we will see rates to continue to be this low in the future. I think eventually QE will slow, and rates will rise.

Some thought's are:

1. Use the money to reduce my taxable income and thus pay less taxes and get Obamacare subsidies.

2. Buy a condo at the beach and get away from the St. Louis winters. Then rent it out the rest of the time. And hopefully also the condo value will at least keep up with inflation.

3. Invest in balanced funds. Averaging in over a year or two.

4. Put away just in case a bargain comes up.

I'll probably do a little of all of the above. Anyone else have any idea's?

 

[growing_older]

I always figured such strategies would RAISE my taxable income, either by the investment gains, or by the cash flow I would need to pay the note. How do you use this to reduce income?

 

[heeyy_joe]

If you have the cash flow to support the mortgage payments I think it is an OK gamble but I think you're way too early. IMO, the Fed has trapped itself into a very long period of QE and a very very long period of selling.

 

[samclem]

I always figured such strategies would RAISE my taxable income, either by the investment gains, or by the cash flow I would need to pay the note. How do you use this to reduce income?

Consider this scenario:
Option 1) For 10 years, withdraw $20K per year from a tIRA or 401K for living expenses. Every dollar is taxable income.
Option 2) Get a mortgage on a paid-for home and put $200K proceeds into an after-tax account. Withdraw $20K per year from the account for living expenses and avoid/minimize withdrawals from the tIRA/401K. The $20K withdrawals of deposited money are non-taxable, and any gains on the funds might be taxed at 0% (if the taxpayer is in the 15% bracket).

Now, the tIRA/401K funds will eventually get taxed, so all this does is push that date farther back (and possibly contribute to a bigger problem down the road if RMDs cause a bump into a higher bracket). But it can be a smart move, particularly if we are trying to optimize the "free money" health insurance subsidies. And lots of folks will be doing just that.

 

[growing_older]

Yes, thanks. I do understand the basic idea that drawing capital from an investment account is a non-income event. But I think you need to also consider the rest of the loan effect. You cannot just draw 20K per year, you need to draw 27K to pay for the additional expense of the loan.

This does push the IRA/401k time horizon back for a few years, but it also increases the taxable income depending on how the 200k loan proceeds are invested. Finally, there needs to be enough income to pay both the interest and the principal on the loan. This means raising taxable income of at least 200K, plus interest (say 7K per year). If you draw that from the loan proceeds, you just push that much income requirement back a few years, but eventually you do have to pay it.

 

[dm]

I'll be turning 56 this year if that makes a difference.

 

[JOHNNIE36]

We also are going to be applying for a home mortgage shortly, but our goal is a little different. However, your thread prompted this post. We have decided to downsize again. The house is getting to be a money pit for repairs and general upkeep. With my age and health, we have to hire everything done. Looking for a condo type attached villa in this community. We have to find the right house and then buy it prior to putting our up for sale. I intend to look at bridge loans and regular mortgages to see which is the best way to go. Friend of mine deals in mortgages so I'm calling him tomorrow.

 

[ShortInSeattle]

I know that at 3.5% the stakes are relatively low, but this still feels like "gambling with your house" to me. If you invest that money in balanced funds and they tank, you're potentially out the money *and* your home. Can you afford to repay off your mortgage again from scratch? If not, you can't afford the gamble. And if so, why not use that capital towards the purposes you listed?

At your age, I'd be pleased as punch to have a paid off home, one of the cornerstones of a lowered budget to help with ER. I wouldn't want to undo that accomplishment.

That's just me though. As always, free internet opinions may not be worth the electrons they are printed on. . Good luck.

SIS

 

[ERD50]

I know that at 3.5% the stakes are relatively low, but this still feels like "gambling with your house" to me. If you invest that money in balanced funds and they tank, you're potentially out the money *and* your home.

...

SIS

I don't understand why drop in a balanced fund would mean 'losing your home'?

I don't think the OP was talking about taking on a huge mortgage, with no source of cash flow other than the investment returns from the mortgage money. As long as you have the cash flow to pay the mortgage (and taxes), how can you lose your home?

However, someone with a paid for home, who used nearly all their liquidity to pay it off, might find themselves in a bind and unable to pay the taxes or maintenance or insurance. They could lose their home.

But if you take a middle ground, what are the risks?

-ERD50

 

[ShortInSeattle]

I don't understand why drop in a balanced fund would mean 'losing your home'?

I don't think the OP was talking about taking on a huge mortgage, with no source of cash flow other than the investment returns from the mortgage money. As long as you have the cash flow to pay the mortgage (and taxes), how can you lose your home?

However, someone with a paid for home, who used nearly all their liquidity to pay it off, might find themselves in a bind and unable to pay the taxes or maintenance or insurance. They could lose their home.

But if you take a middle ground, what are the risks?

-ERD50

I meant he could lose it in the sense that it is currently paid off, and if he invested all the equity in another instrument and lost it, he'd be back to square one. (No equity, or low equity)

Yes, you could buy the same house twice, but that is just semantics. You technically didn't "lose it" I suppose - in that scenario you just used your house like an ATM, you lost the cash, then you are paying the bank the second time for the same house. Sounds horrible.

Of course this money *might* do better out in the world than locked up as equity. He can invest it, buy a vacation home, or even buy frozen OJ futures. I suppose my point is that I wouldn't take that risk with my home equity. You're losing something valuable (a fully paid off home - a positive lever on your budget) for an unknown return. His reasons for taking this loan sounded vague, not a good reason IMO to start the mortgage clock over.

I can't ever imagine taking out a loan to invest in the stock market. The bank's return is guaranteed. Mine isn't.

Just my reaction. Who knows, it may be more "gut" than rational.

 

[ERD50]

... I suppose my point is that I wouldn't take that risk with my home equity. ...

Money is fungible. It isn't taking risk with the 'home equity', you need to look at the entire portfolio and net worth to get a handle on how 'risky' it is.

You're losing something valuable (a fully paid off home - a positive lever on your budget) for an unknown return.

It is just a number on a balance sheet, it doesn't have any value beyond that. And you can have $100,000 of home equity, or $100,000 in a portfolio with a $100,000 loan - net worth is the same. Home values are volatile and portfolios are volatile. $100,000 in a portfolio has the advantage of being more liquid (may or may not be important) and the investment returns are likely (not assured) to exceed current mortgage rates.

I can't ever imagine taking out a loan to invest in the stock market. The bank's return is guaranteed. Mine isn't.

I hear it phrased this way often. But to be true to that, it means no 401K in equities, no equity investment of any kind until the mortgage is fully paid off. After all, if you wouldn't take out a loan to invest in the market, you shouldn't invest in the market while holding a loan either.

That would have left an awful lot of money on the table for an awful lot of people. I would have missed the entire 90's bull market, and maybe I'd still be working.

-ERD50

 

[pb4uski]

....1. Use the money to reduce my taxable income and thus pay less taxes and get Obamacare subsidies.....

I think it would hurt you for Obamacare because Obamacare is based on O-MAGI (modified adjusted gross income) which is before itemized deductions. So your O-MAGI income would increase for the investment income on the investment of the loan proceeds but not decrease for the interest paid on the loan. If the Obamacare subsidies are significant to you, you may want to rethink the loan.

 

[eytonxav]

I think it would hurt you for Obamacare because Obamacare is based on O-MAGI (modified adjusted gross income) which is before itemized deductions. So your O-MAGI income would increase for the investment income on the investment of the loan proceeds but not decrease for the interest paid on the loan. If the Obamacare subsidies are significant to you, you may want to rethink the loan.

I think if the OP was referring to that instead of pulling money from an IRA, he would use the loan proceeds in lieu of the IRA withdrawal to reduce his O-MAGI and that might make him eligible for more subsidy. Also, he could deduct the interest on loan to reduce his taxes further.

 

[ziggy29]

This would make me uneasy even if I had a secure cash flow to finance it. I personally don't want *any* debt I can avoid. That said, if one is comfortable with taking debt they don't *need*, doing it at these interest rates for 30 years isn't a bad deal. Inflation (at least CPI inflation) may remain low for a while, but over the course of 30 years it's hard to see borrowed money at a nominal 3.5% being a losing bet if invested wisely and prudently.

That said, as more and more things (including PPACA subsidies) are based on income and not assets, I think a strategy that lets you get by on a lower income may be a better approach. Increasing your income and your outgo requires a much higher rate of return on the investments when the higher income results in higher tax brackets, more heavily taxed SS and loss of PPACA subsidies. You might be able to reduce the "MAGI hit" somewhat with creating withdrawals from taxable investments and Roth investments, but maybe not all of it.

 

[Independent]

I paid off my home in 2005, I was paying around 6% at the time. But now with rates in the 3.5% range for a 30 year loan, I went ahead and applied.

I don't need the money, not even sure what I'll do with it. I just don't think that we will see rates to continue to be this low in the future. I think eventually QE will slow, and rates will rise.

Some thought's are:

1. Use the money to reduce my taxable income and thus pay less taxes and get Obamacare subsidies.

2. Buy a condo at the beach and get away from the St. Louis winters. Then rent it out the rest of the time. And hopefully also the condo value will at least keep up with inflation.

3. Invest in balanced funds. Averaging in over a year or two.

4. Put away just in case a bargain comes up.

I'll probably do a little of all of the above. Anyone else have any idea's?

1) I'm not sure if doing a "little" really gets you any subsidies - depends on your income.
2) Note that you could take out the mortgage directly on the condo.
3) Leveraged investing - borrow at a fixed rate to invest in equities. Depends on your risk tolerance.
4) Not sure what it means.

On the list, I can see that people in certain income ranges would want to find ways to pay living expenses with principle rather than income. As others have mentioned, you're going to have to pay taxes on that IRA eventually anyway, so you have to worry about shifting between brackets. But it could work.

 

[ziggy29]

2) Note that you could take out the mortgage directly on the condo.

But probably at non-owner occupied rates, which are usually considerably higher.

 

[dm]

Thanks everyone, I havn't pulled the trigger yet, but still thinking that I will. I will most likely not qualify for any subsidies, I just threw that out there. I am looking at borrowing around 30% of my homes worth, or what it was worth in 2001. I'm getting an appraisal on Wednesday, so I'll have a better idea then.

Some of my thought are that my wife is still working part time teaching at the local college till December and that may make getting a loan easier at this time.

We are seriously looking at buying a condo, land, or small place to live at in the winter. This would give us the cash on hand to buy that place when we find what we want. It may take a year or two and rates are low now, plus no problem getting the loan.

I have about 4 years before I can start tapping my 401k and IRA's without going thru the 72t and other hoops. This gives me access to more options without selling current assests.

 

[daylatedollarshort]

1. Use the money to reduce my taxable income and thus pay less taxes and get Obamacare subsidies.

We are doing that. We not only hope to get subsidies, but it also allows us to keep putting our business profits into a 401K a bit longer, instead of drawing down retirement accounts for living expenses in the pre-SS years. The maximum allowable 401K deduction for 2013 for us is $17,500 + $5,500 + 20% of the business profits (up to 49K) X 2, so depending on what we earn we can still defer quite a bit of taxes into retirement accounts.

We are also going to downsize, get something newer and move at least 15 - 30 minutes out of town. This will drop our housing costs by two thirds, which will make it easier to live off the home equity and keep putting away 401k money instead of drawing it down for living expenses.

 

[someguy]

It occurs to me that those thinking about pulling home equity (OP and daylatedollarshort) are examples for the eternal mortgage prepayment debate of cases where it would have been preferred to invest surplus cash rather than pay down the mortgage faster.

 

[PatrickA5]

I suppose pulling out 30% of home equity at low rates isn't that big of a deal. But, I can still recall several friends that took out large HELOCs back in 2000 to make a fortune day trading. It was a "no lose" situation (they thought). They spent a decade paying down the original mortgage and only a year or two to lose it.

Nobody on this forum would be stupid enough to do what my friends did, but I've never had any desire to borrow against my house after I paid it off. Back in 2008 during the Great Recession, it felt so good knowing that I owned my home free and clear.

 

[daylatedollarshort]

It occurs to me that those thinking about pulling home equity (OP and daylatedollarshort) are examples for the eternal mortgage prepayment debate of cases where it would have been preferred to invest surplus cash rather than pay down the mortgage faster.

I think for my household if you throw in qualifying for health care subsidies and putting the money into retirement accounts, the numbers really favor keeping a mortgage. But maybe for others that wouldn't be the best choice.

I don't personally care whether I have a mortgage or not. I just care about maximizing my net worth and minimizing my taxes and health care costs.

 

[halv45]

Could you just get a HELOC in case you needed the money?

I got one with the intention of buying land when I find the right property. It's been 15 years.

 

[ziggy29]

Could you just get a HELOC in case you needed the money?

That would likely come with a higher (and variable) interest rate. Plus, the line of credit could be slashed or terminated by the lender at any time; we saw a lot of that circa 2009.

 

[halv45]

That would likely come with a higher (and variable) interest rate. Plus, the line of credit could be slashed or terminated by the lender at any time; we saw a lot of that circa 2009.

True, but if you have good credit and a smaller loan, they likely wouldn't cancel it.

I had $100k line on a $225k house and they didn't cancel. In fact, I reupped for another 10 years.

What closing costs are on the loan anyway?