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Old 03-19-2010, 05:24 PM   #21
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Originally Posted by clifp View Post
... Somebody, probably Buffett, said that "leverage is the only way for a rich man to become poor". While a small 1st mortgage isn't leverage in the same way as say a margin account, an interest only option ARM, or buying call options, it is still leverage. One thing that leverage isn't good for is a getting a good nights sleep, ...
I won't comment on the mortgage decision itself, as I *know* that you know the pros/cons and have chosen as you see fit. However, I do think that your 'leverage' statement could be misleading to some.

Sure, leverage can be dangerous. But sometimes, I think people just get scared by the term itself, and avoid it w/o digging deeper. That's fine, but they might miss out on an opportunity. Or they might be taking more risk than they think.

For example, who is taking more 'risk':

- Person A with an ~ 50/50 AA who decides to use margin to put 1% of his portfolio on a stock, or...

- Person B, with a 70/30 AA?

Person B doesn't have that dirty leverage or margin term in his portfolio - he *must* be better off, no?

I've been in the position where I saw what I thought might be an attractive short term investment. But I'd have to sell other stock in that portfolio to free up the cash, and I didn't want to trigger a Cap Gain event (or maybe a wash?). So, I used margin for a month or two, on a small % of my portfolio. Slept fine, knowing that I had a chance of a quick profit, and if it went to heck, I risked a total of x% of my portfolio, a risk I was willing to take.

In the meantime, my un-leveraged portfolio could have reduced my net worth far more by dipping just a few %, like markets often do.

Which part of my portfolio should have kept me up at night?

-ERD50
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Old 03-19-2010, 05:30 PM   #22
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Hmmmm.....I have some decisions to make here.

Plan to retire in a year or two, bought a retirement home in the city in December (thought it would be easier to buy while still working) and moved in January. Put 30% down and have an upper-middle six figure mortgage at 4.75%. Closing on my old house next week and net proceeds will be about equal to my new mortgage.

What to do?

Pay off the entire mortgage?

Pay off part (say 1/2) of the mortgage to reduce my monthly payments (my loan can be "recast" like this once it its life or paid off in full any time).

Invest the money for a few years, see what happens to interest rates and then decide.

By way of context:, I have a cola'd pension when I retire that (slightly) more than covers the mortgage (and can also collect SS) and my wife has a similar pension that kicks in in a couple of years (when she turns 55) and another slightly smaller when she's 62. The funds to cover the mortgage would represent about 1/4 to 1/5 of our liquid net worth (including retirement accounts).
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Old 03-19-2010, 06:52 PM   #23
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Originally Posted by ERD50 View Post
I won't comment on the mortgage decision itself, as I *know* that you know the pros/cons and have chosen as you see fit. However, I do think that your 'leverage' statement could be misleading to some.

Sure, leverage can be dangerous. But sometimes, I think people just get scared by the term itself, and avoid it w/o digging deeper.

For example, who is taking more 'risk':

- Person A with an ~ 50/50 AA who decides to use margin to put 1% of his portfolio on a stock, or...
I am the last one criticism the use of leverage. You are right people get scared by the term, when it should be viewed as tool. But hey I get little nervous about using power tools, even though are clearly the right things to use most of the time.

All I am saying is that there is no difference between a 50/50 AA with 1% margin loan and a 51/49 AA. In my case I had 75/25 AA (near the efficient frontier for a young retiree) but because I had 10% house loan my real AA was closer to 85/15. I sold 5% of each and I am now at 80/20 which looks riskier than 75%/25% but in reality my portfolio is safer. If it will earn more money in the future of course the $64,000 question. I'd like be at 70/30% but I am loath to buy either bonds or have 10% in cash earning nothing.
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Old 03-19-2010, 07:24 PM   #24
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Hmmmm.....I have some decisions to make here.

Plan to retire in a year or two, bought a retirement home in the city in December (thought it would be easier to buy while still working) and moved in January. Put 30% down and have an upper-middle six figure mortgage at 4.75%. Closing on my old house next week and net proceeds will be about equal to my new mortgage.

What to do?

Pay off the entire mortgage?

Pay off part (say 1/2) of the mortgage to reduce my monthly payments (my loan can be "recast" like this once it its life or paid off in full any time).

Invest the money for a few years, see what happens to interest rates and then decide.

By way of context:, I have a cola'd pension when I retire that (slightly) more than covers the mortgage (and can also collect SS) and my wife has a similar pension that kicks in in a couple of years (when she turns 55) and another slightly smaller when she's 62. The funds to cover the mortgage would represent about 1/4 to 1/5 of our liquid net worth (including retirement accounts).
Going with my "middle of the road" approach I'd pay off half the mortgage and invest the rest in equity index funds. Here's my reasoning. I'd invest the proceeds from the sale of that house 50/50 anyway so I look at the 50% going into a 4.75% mortgage as the "bond" portion and I'd get the added feel good factor of reducing debt.

I'm also concerned with the general shape of the US economy and part of my motivation for becoming totally debt free is to give me the freedom to live on a very small income. I'm a pessimist so I'm cashing in some money on the way up.
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Old 03-19-2010, 08:31 PM   #25
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Originally Posted by jerryo View Post
Hmmmm.....I have some decisions to make here.

Plan to retire in a year or two, bought a retirement home in the city in December (thought it would be easier to buy while still working) and moved in January. Put 30% down and have an upper-middle six figure mortgage at 4.75%. Closing on my old house next week and net proceeds will be about equal to my new mortgage.

What to do?

Pay off the entire mortgage?

Pay off part (say 1/2) of the mortgage to reduce my monthly payments (my loan can be "recast" like this once it its life or paid off in full any time).

Invest the money for a few years, see what happens to interest rates and then decide.

By way of context:, I have a cola'd pension when I retire that (slightly) more than covers the mortgage (and can also collect SS) and my wife has a similar pension that kicks in in a couple of years (when she turns 55) and another slightly smaller when she's 62. The funds to cover the mortgage would represent about 1/4 to 1/5 of our liquid net worth (including retirement accounts).
In a word you need to run the numbers. There are a quite a few mortgage threads in the forum. In particular ERD has done great work outlining all of the various factors you need to do make a financial decision. With a mortgage in the few hundred thousand range, the tax benefits are a big factor and really requiring using Turbo Tax to do some estimates. It is very possible that once you retire the benefits of having a big mortgage deduction are reduced because you simply pay off the mortgage and take the standard deduction. That is what is going to happen in my case.

My wild ass guess is that probably doesn't make much difference financially while you are working but probably is better once you retire to pay it off in today interest rate environment. But so much depends on your tax and financial situation that it just a wild ass guess.

The emotional component is also important. There is a psychological benefit to not having a mortgage. I have had no mortgage, mortgage, no mortgage, mortgage, no mortgage. Right now no mortgage feels much better.
I also know my investment temperament and if interest rates go to 10%, I will be cursing a blue streak about getting rid of $250K of below 5% debt. Lots of people the board won't have second thoughts.
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Old 03-19-2010, 08:56 PM   #26
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One decision I made with regards to paying for our new house:

When we sold our prior house in 2005 (which we owned outright), I put the proceeds in OAKBX - calling it our "house fund". It had a fun ride, but overall appreciated very nicely even though it gave back a little during 2008.

But I can't bring myself to sell this fund to pay for the house! Not when already have enough cash in my MM funds which are only paying 0.03% interest!!!! (Not to mention that any realized gain would be taxable).

So that fund is going to be rolled into our retirement portfolio. And we are going to use cash in MM funds to pay for the house instead. I guess that is why the Fed is doing what it is doing - to get us to spend our MM money!

Audrey
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