That's a great point. It's pretty useless to borrow money and invest it in ANYTHING that has an expected return less than the borrowing costs. This should be money you don't need to touch for 10+ years up to 30 years. No need to limit year-to-year volatility.
Is it time to refinance a paid for home?
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That's a great point. It's pretty useless to borrow money and invest it in ANYTHING that has an expected return less than the borrowing costs. This should be money you don't need to touch for 10+ years up to 30 years. No need to limit year-to-year volatility.
Gone4Good
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Take a look at your current asset allocation. If you have a big slug of money market funds earning <1%, treasury bonds earning 2-3%, etc. it makes very little sense to borrow at 5%. Why would you lend out part of your portfolio at between 1%-3% and simultaneously borrow at 5%? My advice would be to reallocate the low yielding part of your portfolio into the (hopefully) higher yielding investments you'd buy with the borrowed money. Once you've maxed out on that, only then would it make sense to borrow IMHO.
kcowan
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Once your wife retires, how long will it be before you want to travel and enjoy life together. Oh but we need the cash flow to pay the 30-year mortgage!
Are you an opportunist or do you need the extra after tax returns to ER? If you need them then go for it. If not then forget it!
Are you an opportunist or do you need the extra after tax returns to ER? If you need them then go for it. If not then forget it!
dm
Full time employment: Posting here.
I'm just looking at the historicaly low mortgage rates and think this may be a good time for a little leverage. I'm not banking on this to fund my retirement, just make alittle extra. I feel that we have a greater chance for inflation to hit and interest rates to rise, than fall in the future. It wasn't that long ago that getting 6% or better in CD's alone wasn't that hard to find. My current allocation is about 70% equities, but this does not count the value of our home or the wifes pension. We could live on the wifes pension alone and do fine.
I also like the idea of having the cash on hand instead of locked up in the house.
I need to run the numbers and talk with the bank before I chose. More than likely I will put it off and rates will rise before I pull the trigger.
I am really supprized that others arn't looking into this.
I also like the idea of having the cash on hand instead of locked up in the house.
I need to run the numbers and talk with the bank before I chose. More than likely I will put it off and rates will rise before I pull the trigger.
I am really supprized that others arn't looking into this.
ERD50
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Good point. Funny thing is, I bet that when people look back at this time (assuming the market recovers in the not-too-distant future), they will say "Wow, what a great opportunity, anybody with half a brain would have been all over that and made out like a bandit! Lucky bums!".
But, it is exactly those times that people feel hesitant about doing these things.
I'm tempted, but I already have bought (re-balanced) on the way down. It sure is tempting to buy more at these prices, but I'm going to stick by my rough AA guidelines for risk tolerance. I sure don't want to (and may not be able to) go back to work in case things do get far worse before they get better, so I've got to play it reasonably safe.
But if you are in a position to take on a bit more risk, this seems like the time to do it.
-ERD50
ziggy29
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A perfect historical example would be in 1981 when long term Treasuries were yielding in the double digits. Think about it -- a U.S. government-guaranteed 10-12% return for 20-30 years...
In retrospect that looks like the ultimate no-brainer investment, doesn't it? But at the time, there was so much fear of unchecked runaway inflation that yields over 10% persisted for quite some time. Just as there are probably many opportunities today which, when viewed from the comfort of hindsight, will seem like obvious moves even as today we wallow through the uncertainty.
I went to a Schwab [-]timeshare sales presentation[/-] client appreciation dinner in 2004 or 2005 (can't remember exactly). I was sitting next to a man who'd bought a slug of 30-year Treasury bonds that had yielded 9%. They were maturing and he was desperately seeking someone to take him by the hand and lead him to the promised asset-allocation land.
The Schwab brokers at our table were drooling all over their napkins.
DAYDREAMER
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Darryl
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I refi'd last spring, (15 yr at 4.625) at the last minute I had them rework the loan and give me some cash out which I put in stocks spring and summer as things were falling. oops!!!!!!!!!!!!!!!!!!!!!!!
Thankfully I only took a little but just one more example of (not smart) people making dumb money mistakes. Possibly a 2nd job as a poster child for what not to do.
That money should be in the market for decades and time may redeem that decision but it doesn't look very bright right now.
Investing in the stock market involves risks, past performance does not guarantee future results etc. etc. etc...
Balance your willingness, need and ability to take risks, set up an appropriate AA and follow it. Stories of testosterone damaging investment results are too numerous to mention. Disclaimer: I do not always follow my own advice.
Thankfully I only took a little but just one more example of (not smart) people making dumb money mistakes. Possibly a 2nd job as a poster child for what not to do.
That money should be in the market for decades and time may redeem that decision but it doesn't look very bright right now.
Investing in the stock market involves risks, past performance does not guarantee future results etc. etc. etc...
Balance your willingness, need and ability to take risks, set up an appropriate AA and follow it. Stories of testosterone damaging investment results are too numerous to mention. Disclaimer: I do not always follow my own advice.
Darryl
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What? What the heck is a purchase money mortgage. I have no idea what you just replied.
aka "cousin to a land contract" (If law 101 from 1980's is fresh enough in my mind the buyer holds the title)
What
a purchase money mortgage is a mortgage put on a property by the buyer at the time of purchase to provide the money to the seller to fulfill the terms of the purchase contract.
DAYDREAMER
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Sorry to send this thread astray, but, from how I understand your description, a "purchase money mortgage" is a standard mortgage. Just a different way of saying it.
DAYDREAMER
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There are perhaps several definitions of "purchase money mortgage." I would not restrict a purchase money mortgage to "seller financing." And I have no idea how it was being first used in this thread.
Bankers and lawyers might have different definitions of the term, like the term "mortgage." (For lawyers, a mortgage might mean a lien on real estate securing payment of a loan; for bankers, it might mean a loan advanced from the bank to a borrower to pay for the purchase of real property.) But from my legal perspective, a "purchase money mortgage" has certain legal attributes in many states and means under most creditor-debtor laws (e.g. Homestead laws), a loan advanced to pay for the "purchase" of residential property that the borrower will generally occupy. The significance of the definition is that several states will not permit a "deficiency judgment" to be taken against a purchase money mortgage -- or, in other words, this type of financing is nonrecourse and the lender (whether a bank or seller) cannot go beyond the collateral to satisfy payment of the obligation created by the purchase money mortgage.
There are also tax treatment differences between the amount of a mortgage used to purchase a house, the amount used to improve a house, cash out that was not used on the house at all, and cash out that was used to invest. And they are different for AMT of course.
Yeah, and Professor Shiller has remarked that we got into this housing bubble (resulting in this global economic mess) when we started viewing the house more like an investment vehicle, with special tax treatment, as a way for everyone to get rich, instead of a place to live. It's like the current thread, right?
Haven't read this new book by Professor Shiller, but I have a signed copy from the authors. Akerlof, G.A. and Shiller, R.: Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism.
Having a paid for house gives me priceless peace of mind and I wouldn't borrow on it to invest simply because I don't have the stomach for it. My dear friend has a husband who was in banking for his entire career. They paid off their home several years ago but then the husband decided to refinance the entirety of the home and invest the money in bank stocks. You can guess what the result was. They lost nearly everything and now they have to pay for the house all over again. Not good!
I feel the same way, Shoe. But it's just a feeling, not exactly dispassionate analysis of the situation. Hopefully, our feelings about homeownership may get handed down to the next generation. My daughter, with the entire downpayment funding from the Bank of Dad and Mom, just placed a contract on a modest condo, which was accepted by the bank that foreclosed on the property. She's a teacher, excited about her first owned residence, and we're hoping we're sending (and she's receiving) all the right messages about home ownership; her credit score is even better than my score, so she's financially responsible. But if she ever places a HELOC on this property or decides she wants to put someone else's name of the deed, the Bank of Dad and Mom's gift become's a loan immediately due and payable, with God and her little sister as our witnesses.
Meanwhile, I could easily refinance or HELOC my own homes (or better yet, borrow from my 401K at .77% interest -- yep, it's .77 interest) and mess with arbitraging or investing -- I just don't view the house that way -- saw my dad save for his house, which kept him and my mom off the welfare rolls during their lifetime -- just wouldn't treat my home as an investment bank.
Meanwhile, I could easily refinance or HELOC my own homes (or better yet, borrow from my 401K at .77% interest -- yep, it's .77 interest) and mess with arbitraging or investing -- I just don't view the house that way -- saw my dad save for his house, which kept him and my mom off the welfare rolls during their lifetime -- just wouldn't treat my home as an investment bank.
ERD50
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Rather extreme example, no?
To go from "I don't have the stomach for risk" to someone who put all their money in one sector just isn't meaningful.
It's a little like saying "I would never drive a car, because last night on the news they had a story about a guy who got drunk and drove his car off a cliff doing 120 mph".
So, based on your story about how someone can loose money in an investment, I take it you do not invest at all. What do you do with your money to keep it risk free? Or is it all in your house?
-ERD50
calmloki
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
We're kinda PushmePullyou people. No single definitive answer, no 100% money on black or on stocks. Most of our places are paid off, but we are carrying a 15 year mortgage on our home at 4.99 with PenFed. Could pay it off, but we would have to dip into the 6.25% PenFed CDs to do it. Weirdest bank situation i've ever been in. In January the CDs mature, but we will still carry the mortgage because the current rates are without precedent in my experience - 8% seems more like a normal amount. Hoping we can continue to find people willing to pay 10% to borrow from us, or maybe we'll be drawn kicking and screaming to buy more places. I agree that inflation and higher interest rates seem like a no brainer and that bettting on that is smart. Ten years from now we'll see just how smart that is....
ERD50, if you read again , what I said was I couldn't stomach risking my house, not that I couldn't stomach risk. We have a COLA'd pension as well as a 403b and other investments. I am probably more sensitive to the type of risk we are talking about because I am directly affected. My mother lost her life long home this same way and now lives with me because she has nothing left but a very small SS check. My SIL lost her husband due to cancer and received $150,000 in life insurance. Rather than pay off her house, she gave it to a financial advisor(who also suggested she pay off the house) and between the drop in the markets and living beyond her means, she filed bankruptcy and the house was foreclosed on. Risk leaves wreckage sometimes.
ERD50
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
As the other posts have covered, it's not a "Yes/No" question. It depends on what other investments you have and your overall portfolio (basic AA). And making bad choices is simply making bad choices, market risk or not.
Take your SIL's unfortunate circumstance - for simplicity, let's ignore the 'living beyond her means', as that will sink anyone (by definition). And again for simplicity, let's say the house had $150,000 remaining on the mort.
So, we need to know about her AA and portfolio. If this is the only $150,000 she has, she needs to invest it conservatively. And that is unlikely to earn more than mortgage rates, so it's not real attractive.
OTOH, if it *is* all the money she has, and she pays off the mortgage, she has nothing to cover an emergency. The liquidity of that $150,000 is important and valuable. And it will pay the mortgage for many, many months (years) while she gets situated. If she plans to keep the house she is going to need an income stream to support it. Don't forget, if she does not pay off the house, she HAS that $150,000 (which should be in conservative investments).
For example, GNMAs are paying ~ 4.5%, they do vary some in NAV, but not much and are not 'risky'. So, even if that is less than the mortgage rate, you can look at it as paying a small fee for liquidity. What's the option if an emergency comes up or she loses her job and she paid off the house? There are still bills to be paid, ins, utilities, taxes, food on the table, gas for the car, etc. You are going to pay for liquidity at that point, and it will probably be more expensive than the difference in the mortgage and GNMA rates, if available at all.
So, if you want to rephrase this as "Should a person who would do a really bad job of investing the money pay off the mortgage instead?" Well, then I'd say yes - but it would be better if that person got a little education instead, and made an informed decision. But that could still leave them in a liquidity crisis, so maybe they just swapped one problem for another?
Now, let's look at the 'living beyond your means' aspect of your SIL's situation. OK, if your SIL invested that money at the exact peak, $150,000 in the market would still be worth over $65,000 at the recent lows. So, if she blew that $65,000, then I'm also sure she would have also got into trouble if the house was paid for - she would have racked up CC debt, taken out a HELOC, something. I don't think a paid off house is a solution for a spend mentality.
This is a financial tool, and like so many other things - don't condemn a "tool" because it can be misused by some.
-ERD50
ERD you have some very good points. For an educated investor, refinancing the family home in order to invest the money probably works a good percentage of the time. For Dh and me, though, a paid for home makes a soft pillow because we value peace of mind more so than a fatter bank account. I'm not saying that everyone has to have a paid for home in order to have peace. Just that WE do.
