Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Is it time to refinance a paid for home?
Old 04-02-2009, 07:22 AM   #1
Full time employment: Posting here.
 
Join Date: Mar 2005
Location: Punta Gorda, FL
Posts: 664
Is it time to refinance a paid for home?

30 yr fixed rates are around 5% now. I'm starting to think about refinancing my paid for home and invest the money. I havn't run the numbers yet, but has anyone else started to look at this?

I believe in the long run the market will improve, and inflation will kick up again. I would invest the money fairly conservativly. Something like 30% index funds and the rest MM, Bond funds, and some RE or REITS.

My wife is still currently employed, she is 48, and doesn't plan on retireing for a few months yet. So I don't think we would have a problem getting a loan. Also our home is only around 10-15% of our net worth, so we are really not betting the farm.
__________________

__________________
dm is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 04-02-2009, 07:50 AM   #2
Thinks s/he gets paid by the post
tryan's Avatar
 
Join Date: Mar 2005
Posts: 2,449
Forgetting the emotional-debt-thing ... your timing couldn't be better.
__________________

__________________
FIRE'd since 2005
tryan is offline   Reply With Quote
Old 04-02-2009, 08:12 AM   #3
Recycles dryer sheets
smileydog's Avatar
 
Join Date: Feb 2007
Posts: 193
For me... I would not borrow money to invest. May look good on paper but I would not do it. If your home value is only 10-15% of your net worth I would find another way to participate in the market.
__________________
Oh Look, a squirrel!
smileydog is offline   Reply With Quote
Old 04-02-2009, 08:18 AM   #4
Recycles dryer sheets
 
Join Date: Mar 2009
Posts: 357
DM, would a HELOC also work? My sister's current HELOC is at a very low rate - I think under 3%.

For other people looking to refinance my advice is to call the major banks directly and if you have excellent credit make sure you get something a couple points below the national average.

I'm in the process of refinancing to lock in a lower interest rate. I spoke with a lot of brokers and did the lending tree thing but the best offer came from calling my mortgage company (Wells Fargo) directly. They offered me a no-cost, 30 year fixed (no prepayment penalty, no escrow) for 5.125%. I could have gotten ~4.5% but didn't want to pay closing costs and any points. Plus I figure if rates continue to drop, I'll just do the no-cost refi thing again and not lose anything.
__________________
bank5 is offline   Reply With Quote
Old 04-02-2009, 09:32 AM   #5
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Personally I wouldn't borrow money to invest, but if you have a long-enough time horizon, excellent cash flow and (most importantly) very secure employment (or other very secure income stream), I wouldn't oppose someone doing this if they understood the risks and could afford to lose big on the money they borrow.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 04-02-2009, 10:17 AM   #6
Full time employment: Posting here.
 
Join Date: Jul 2007
Location: ST LOUIS
Posts: 993
Just be careful, I think this is a bear market rally.
__________________
rec7 is offline   Reply With Quote
Old 04-02-2009, 11:39 AM   #7
Recycles dryer sheets
 
Join Date: Feb 2008
Location: Colorado
Posts: 131
Well - we're being quoted 4.5% to refinance now - and that will definitely improve our cash flow. (We don't take $ out when we refinance.)
__________________
NotReady4Purple is offline   Reply With Quote
Old 04-02-2009, 01:17 PM   #8
Recycles dryer sheets
 
Join Date: Mar 2008
Posts: 223
Borrowing on your home to invest is crazy talk. But, I am one who values the huge security blanket having my house paid off. Especially in these times, when layoffs are happening, including my job! I don't welcome being layed off, but it it happens, I am less at risk due to my security blanket.
__________________
DAYDREAMER is offline   Reply With Quote
Old 04-02-2009, 01:32 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 2,971
I certainly wouldn't do it. It's possible it could pay off in the long run but to me it's not worth the risk. This coming from someone who invests >90% in equities.
__________________
aaronc879 is offline   Reply With Quote
Old 04-02-2009, 01:38 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,382
Quote:
Originally Posted by DAYDREAMER View Post
Borrowing on your home to invest is crazy talk.
Then is it also crazy for someone who has a purchase money mortgage to invest in the market? Shouldn't he also pay off his mortgage?

Or is this a state where it matters which door you use to enter?

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Old 04-02-2009, 01:43 PM   #11
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by haha View Post
Then is it also crazy for someone who has a purchase money mortgage to invest in the market? Shouldn't he also pay off his mortgage?

Or is this a state where it matters which door you use to enter?
It really is a state of mind thing. We're really talking about the equivalent question in two different directions. Dave Ramsey uses that one all the time when someone asks if they should invest a lump sum windfall or pay off the mortgage.
"I got this $100,000 lump sum. Should I invest it in the market or use it to pay off the mortgage?"

"If you owned the house free and clear, would you borrow $100,000 against it to invest in the market?"

"Of course not. No way."

"Then why would you invest $100,000 when you have the chance to pay off the mortgage with it? Either way you have either $100,000 in investments and a $100,000 mortgage, or you have a paid off house with no additional investments."
And yet, the mentality shifts so much for many people depending on their starting point. Many people who would never think of talking out a loan against their home equity to invest still think nothing of investing extra cash flow if they already had the mortgage. It's a pretty fascinating exercise in human nature.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 04-02-2009, 02:00 PM   #12
Recycles dryer sheets
 
Join Date: Oct 2007
Posts: 80
Personally I wouldn't do it. It's basically a similiar argument of whether you want to lump sum invest (borrowing against your home) or DCA (putting more money in each month since you have higher cash-flow due to no mortgage).

Since your home is only 10-15% of your networth, that does remove most of the risk aspect from the equation of losing the home. So then it becomes the question of: do you want to borrow now and try to beat the rate of the mortgage, or do you want to invest more money each paycheck and not worry about timing the lump sum investment.
__________________
HornedToad10 is offline   Reply With Quote
Old 04-02-2009, 02:02 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Moemg's Avatar
 
Join Date: Jan 2007
Location: Sarasota,fl.
Posts: 10,031
Several of my friends did just that and now they are ready to retire but their savings are down and they still have a mortgage . If you are young and gutsy it might be a great move .
__________________
Moemg is offline   Reply With Quote
Old 04-02-2009, 02:36 PM   #14
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
Quote:
Originally Posted by dm View Post
30 yr fixed rates are around 5% now. I'm starting to think about refinancing my paid for home and invest the money. I havn't run the numbers yet, but has anyone else started to look at this?
Gosh, remember 1999 when everyone was maxing out their credit cards to buy tech stocks?

Take a look at some of the 2004-era discussions in this archive:
http://www.early-retirement.org/foru...ney-30644.html

I've been tracking our mortgage performance against a small-cap value ETF for over 4.5 years now, and it's currently underwater. Of course history is on your side for periods greater than 20 years, but then U.S. history has never seen two stock-market contractions so close together as these.

A couple issues you may want to confront:
- Are you staying put? The median American moves every seven years.
- Are you earning less than the mortgage rate on any other assets? It makes no sense to pay 5% on a mortgage if you have bonds or Treasuries paying less. And if you keep a lot of your portfolio in CDs then you're also paying for the privilege.
- Are you sure you want to raise your expenses now for a long-term bet that may not catch up and pay off until you're in your 70s? Or one that may not pay off at all?
- If you raise your expenses, how long can you/spouse remain unemployed? You have to pay the mortgage whether you're employed or not, and whether your investments are performing or not. And you don't want to cash out the equities to pay the mortgage if they're down 20%.

Here's another data point to consider: When we took out our mortgage in 2000 its value was about 20% of our ER equity portfolio. Then after 9/11 it was over 30% of our portfolio. Over the next seven years the mortgage ratio declined into the low teens, and over the last year it's pushed 30% again. Will that sort of ratio affect your sleep at night?

Here's a thought experiment: pretend you've done as you planned and the mortgage-approval process has gone well. (Good luck with that.) Now imagine that a weather or terrorism disaster strikes and the stock market loses 25%... and stays there for a couple years. During 2007-8 we've all learned that we can calculate the effects of that type of incident on our portfolios, but the vast majority of us were not ready for the effect on our emotions.
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Old 04-02-2009, 03:38 PM   #15
Full time employment: Posting here.
 
Join Date: Mar 2005
Location: Punta Gorda, FL
Posts: 664
It wasn't that long ago, many thought it was foolish to pay off a mortgage instead of leaving the money invested. Now it would seem that there would be less risk since we are in a downturn. Now I know of coarse that it could continue.

I'm thinking that I could currently get 3 or 4%, not sure how the taxes would work, probably a wash. But in a few years with inflation, interest rates would rise along with the returns on other investments. I feel that rates are not likely to remain this low for a long period of time.

If I'm wrong I still have the money and can pay the house back off. I may lose a percent or two, but not likely the whole thing. And my wife is a school administrator with 27 years in. She can retire at anytime and get a nice pension, she was going to retire last year but decided to work one more year.

I paid off my home back in 2005 and I don't regret it. Im just wondering if now might be a better time to take on a little debt.
__________________
dm is offline   Reply With Quote
Old 04-02-2009, 03:42 PM   #16
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by dm View Post
And my wife is a school administrator with 27 years in. She can retire at anytime and get a nice pension, she was going to retire last year but decided to work one more year.
Ah. Well, in this economy that's like holding a winning lottery ticket. This makes it a little easier and more justifiable to assume the risk. I still don't think I'd do it even then, but this definitely does make the risk a lot more manageable.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 04-02-2009, 10:35 PM   #17
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
I asked for cash out on my mortgage refi application, so if that goes through I will invest the extra. It gives me 30 years worth of cash at 4.375% fixed rate (plus some points). If the market does worse than that over 30 years that I'll have bigger problems than this loan.

My HELOC only runs for 7 years, at which time I need to renew it. While the current rate is low, it will increase real quick when that "hyperinflation" hits. plus that 7 year period will be getting closer. I didn't like that in 2001-2005. Nonetheless, my HELOC money is in the market once again, but probably for just a few years and with a shorter term strategy suitable for short-term money.

Just one of the "crazy" people.
__________________
Animorph is offline   Reply With Quote
Old 04-03-2009, 05:36 AM   #18
Thinks s/he gets paid by the post
Rambler's Avatar
 
Join Date: Jul 2007
Posts: 2,243
We paid off our house before we did serious investing (in the stock market - we did have a few rentals for a while but didn't make anything when we sold). Once the home(s) were paid off, we started pouring into the markets. I would personally never put my home at risk in the market. But if you still have the pension income, and could live without it if it were all directed to pay the mortgage (worst case scenario) then I suppose you could...but why would you. Then again, if a worst-case scenario happened, you may lose the other 90% of your net worth that is not the house, and have nothing. Nah, I wouldn't do it...there are some things where you should "leave well enough alone"...such as your family's shelter.

FWIW,

R
__________________
Find Joy in the Journey...
Rambler is offline   Reply With Quote
Old 04-03-2009, 09:42 AM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,264
Quote:
Originally Posted by dm View Post
30 yr fixed rates are around 5% now. I'm starting to think about refinancing my paid for home and invest the money. I havn't run the numbers yet, but has anyone else started to look at this?

I believe in the long run the market will improve, and inflation will kick up again. I would invest the money fairly conservativly. Something like 30% index funds and the rest MM, Bond funds, and some RE or REITS.
All other pros/cons aside - does it make sense to do this if you only are comfortable with 30% in the market?

IOW, what are the odds that a portfolio with a high allocation of MM/Bonds will beat your mortgage? That is the 'bet' you are placing when you decide to invest mortgage money. A high market allocation is a risk - the market might underperform over your mortgage term. No risk, no reward. But, what are the odds that MM/Bonds will outperform a mortgage? Slim I think. So, I suspect the numbers will show that you need a fairly high market exposure for this to work on average - and if you are not comfortable with that market exposure, then you probably should not do it.

I'd look at your AA before/after and see if it fits your risk tolerance.

-ERD50
__________________
ERD50 is offline   Reply With Quote
Old 04-03-2009, 09:48 AM   #20
Thinks s/he gets paid by the post
frayne's Avatar
 
Join Date: Oct 2002
Location: 19th Hole
Posts: 2,529
Borrowing money to invest, sounds pretty risky to me.
__________________

__________________
A totally unblemished life is only for saints.
frayne is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
first time home owner Alexg Young Dreamers 9 10-30-2007 09:41 PM
Refinance or Home Equity Loan? Gail FIRE and Money 12 08-28-2007 08:10 PM
Paid off home- Now where should extra money be invested ?????? Foodeefish Young Dreamers 8 11-15-2006 09:09 PM
Web Site for Calculating Cumulative Dividends Paid Over Time? terminator FIRE and Money 3 09-20-2006 03:43 PM
Part time work at home? dbolda1 Hi, I am... 7 10-25-2003 02:49 PM

 

 
All times are GMT -6. The time now is 01:26 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.