Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Refi payed off house to invest?
Old 01-12-2009, 08:18 AM   #1
Thinks s/he gets paid by the post
grumpy's Avatar
 
Join Date: Jul 2004
Posts: 1,321
Refi payed off house to invest?

I would like to draw on the expertise of those on this board to identify the factors that I should consider in deciding if this scenario makes sense:

We bought our new home for cash four years ago. Although prices have fallen, the house is still worth close to what we paid for it.

We are both retired with COLA'd pensions that cover all basic living costs but we have little extra income to invest.

With the overall market at very attractive levels and 30 year fixed mortgage rates around 5%, I am toying with the idea of mortgaging the house to the hilt and using the cash to invest for the long term.


What are the land mines lurking out there?
__________________

__________________
grumpy 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 01-12-2009, 08:37 AM   #2
Recycles dryer sheets
 
Join Date: Oct 2008
Posts: 295
Well, I did something like this in 2003..but i didn't use 100% or 80% of the value of my paid for home.. only 33%.. sort of a compromise..

I Invested it in Reits ...
After I made What I owed and my Interest I paid back to me? I sold them off and left the Bal. Profits Ride... I felt pretty good at end of 07' , but not so great now after it loosing some -45% of it's value, but There still is Significant $ in there left to make a good run of things when Reits recover..

On the otherhand? If your In a decent Area? Ck it's previous APY growth upto 2005 ( mine is 8%) thus it's growing Tax free for that First $500k and probably will go to the 1st 1 Million by the time you may want to Sell it..

Thus you may not want to Gamble the old "Bird in Hand" trick..

Or Folloow the Old" everything in Moderation" , Except playing Golf..
;->)
__________________

__________________
Dennis is offline   Reply With Quote
Old 01-12-2009, 08:40 AM   #3
Administrator
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 38,846
There is always the probability possibility that after taxes, your investment proceeds won't cover the 5% interest plus closing costs on the mortgage.

You could become upside down on your house, and decide for whatever reasons that you would like to move (not a nice scenario).

Really, as we have discussed in so many pay-off-the-mortgage threads, there are valid arguments on both sides of this issue.

Personally, I have decided not to re-mortgage my home. In fact, last year I closed my unused HELOC since it was gathering dust. I don't see myself as a big time, savvy investor, though. When I move north to Missouri to ER, I will probably end up in a less expensive paid off home than my present paid off home, but I don't plan to invest the excess - - I plan to spend it. (OK, I am not entirely ditching LBYM but I want a new car, and I will want to redecorate the new home and possibly upgrade the kitchen or bathroom, and then there are the moving expenses to pay, and new furniture, and I want to set up a home gym, and, and... ).
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities.

- - H. Melville, 1851
W2R is online now   Reply With Quote
Old 01-12-2009, 08:44 AM   #4
Full time employment: Posting here.
 
Join Date: Oct 2007
Location: New York
Posts: 898
Would you be able to cover the mortgage and all your living expenses form the pensions? What happens if the market drops another 30% and doesn't recover for 6-8 years?
__________________
Money's just something you need in case you don't die tomorrow.
Maurice is offline   Reply With Quote
Old 01-12-2009, 08:52 AM   #5
Thinks s/he gets paid by the post
 
Join Date: Feb 2006
Posts: 1,183
If you currently have little left over to invest, what makes taking on a housing payment palatable? I might tighten the current purse strings and buy in with the leftovers.
__________________
crazy connie is offline   Reply With Quote
Old 01-12-2009, 10:32 AM   #6
Thinks s/he gets paid by the post
73ss454's Avatar
 
Join Date: Oct 2004
Location: LaLa Land
Posts: 4,378
Grumpy, after reading your posts for a few years I know that you're in good shape financially. That said, why would you even want to bother with a maybe when all your ducks are already in a row.

If it were me I'd just sit and watch.
__________________
73ss454 is offline   Reply With Quote
Old 01-12-2009, 10:35 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Quote:
Originally Posted by grumpy View Post
I would like to draw on the expertise of those on this board to identify the factors that I should consider in deciding if this scenario makes sense:

We bought our new home for cash four years ago. Although prices have fallen, the house is still worth close to what we paid for it.

We are both retired with COLA'd pensions that cover all basic living costs but we have little extra income to invest.

With the overall market at very attractive levels and 30 year fixed mortgage rates around 5%, I am toying with the idea of mortgaging the house to the hilt and using the cash to invest for the long term.


What are the land mines lurking out there?
A few things:

1)Why would you WANT a mortgage?

2)If the money you invest loses money, now you have a double whammy

3)If the pension and other income sources provides EXTRA income, then use that to "play" ........
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Old 01-12-2009, 10:47 AM   #8
Moderator Emeritus
Bestwifeever's Avatar
 
Join Date: Sep 2007
Posts: 16,373
Why would you want to do this--it sounds like you have a good life without it?

I personally wouldn't risk my house by using its equity. If you haven't had $$ in the market before, do you think you would be comfortable with its ups and downs (mostly downs for the next few months per even the optimists: http://finance.yahoo.com/tech-ticker...c-Road-Ahead)? I know some sites offer questionnaire to determine your risk level and thus figure out an appropriate asset allocation--you could take those and see if you really would be comfortable with investments. I agree you could then look at your budget, see where you could cut just in the short term to get a little extra cash, and then play with that maybe?

DH was always jealous of people who talked about their brokers and their investments and margin this and hedge fund that and 24 percent gains, but those people haven't been talking much lately.
__________________
“Would you like an adventure now, or would you like to have your tea first?” J.M. Barrie, Peter Pan
Bestwifeever is offline   Reply With Quote
Old 01-12-2009, 10:49 AM   #9
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,315
I wouldn't take out a mortgage to finance stock investments, but I would look at utilizing buying power in a margin account. At my broker, the interest rate on a debit balance over 25K is 2.75%. Many good quality stocks have dividend yields that cover this borrowing cost.
__________________
FIRE'd@51 is offline   Reply With Quote
Old 01-12-2009, 10:56 AM   #10
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 42,077
Grumpy, mortgage roulette isn't a good game in spite of what appear to be above average odds in today's market. My advise is to find yourself another hobby - maybe take up skydiving. That should protect your bank account while yielding the same results re your underwear.
__________________
Numbers is hard

When I hit 70, it hit back

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Old 01-12-2009, 10:58 AM   #11
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
I assume you could handily pay the mortgage costs with pension income. Since your pensions are rock-solid, if you want to invest more money in stocks this is likely the safest and cheapest long term source of funding.

Margin loans are different since they are always callable. A big downdraft can cause you to be sold out.

However, although stocks look cheap today, they can always get cheaper and definitely have at times, like 1974.

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 01-12-2009, 11:10 AM   #12
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,315
Quote:
Originally Posted by haha View Post
Margin loans are different since they are always callable. A big downdraft can cause you to be sold out.
Good point. One has to be careful with margin credit. I stay well below my maximum buying power. I also have securities in a cash account which I could move to my margin account in the event of a margin call.

Also, I believe only the interest on 100K of a refinance is tax deductible, while all the margin interest is deductible against securities' taxable earnings.
__________________
FIRE'd@51 is offline   Reply With Quote
Old 01-12-2009, 11:11 AM   #13
Thinks s/he gets paid by the post
JPatrick's Avatar
 
Join Date: Jun 2005
Posts: 2,494
Assuming mucho diversification and a five year timeline, your plan sounds reasonable.
I do think your timing over the next six months will be critical. If we get another big leg down it could radically change how you look in five years if you get in too early.
Personally, the mere fact that you are carefully considering such a move gives me hope that a turnaround (to the upside) is near.
Good Luck!
__________________
JPatrick is offline   Reply With Quote
Old 01-12-2009, 11:37 AM   #14
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
What if something happens to one of you and the one cola pension goes away could the survivor make it on their pension alone with the added expense of a mortgage ?
__________________
Moemg is offline   Reply With Quote
Old 01-12-2009, 11:53 AM   #15
Thinks s/he gets paid by the post
 
Join Date: Mar 2006
Location: Houston
Posts: 2,155
Quote:
Originally Posted by grumpy View Post
With the overall market at very attractive levels and 30 year fixed mortgage rates around 5%, I am toying with the idea of mortgaging the house to the hilt and using the cash to invest for the long term.


What are the land mines lurking out there?
I think it's a good idea. But wouldn't want to wait a little longer? May be 6 to 12 months from now. The interest rate is more likely to go down. Same with the price of homes.

You might have a problem with mortgaging your house, due to your unemployed retired status.

Sam
__________________
Sam is offline   Reply With Quote
Old 01-12-2009, 12:10 PM   #16
Full time employment: Posting here.
Urchina's Avatar
 
Join Date: Feb 2008
Location: Central Coast, California
Posts: 891
How would mortgaging your home and putting the money in stocks affect your asset allocation? Would you suddenly have more in equities than your AA calls for?

You bought your home for cash fairly recently -- was there a reason you paid cash instead of financing? Does that reason still apply to you now?

If you want more play money, what about going back to w**k part-time to increase your cash flow? (Or, would that negatively affect your pension income?)
__________________
"You'd be surprised at how much it costs to look this cheap." -- Dolly Parton
Urchina is offline   Reply With Quote
Old 01-12-2009, 12:20 PM   #17
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
As long as you like your odds of making enough by investing to cover the loan costs (after taxes!) and do not get caught with a loan that needs to be repaid while the market is down I'd go for it. I'm keeping my mortgage and have drawn on my HELOC and am essentially investing it all (because I could pay it all off but don't).

Taxes are somewhat of a pain if you go for more than $100k on a loan that is not for a house purchase, and a double pain if you might have to pay AMT. Above that amount you'll have to prove you are investing the money and you can deduct the interests as investment expenses. It helps to have investment income (not capital gains) to offset the interest. You'll have to check into the tax details to see if it's worth it for you. It's a lot different proposition if the loan interest is not tax deductible.

Interest rates on loans that are strictly cash-out will be higher than those you see advertised for home purchase.
__________________
Animorph is offline   Reply With Quote
Old 01-12-2009, 01:36 PM   #18
Recycles dryer sheets
 
Join Date: Mar 2008
Posts: 223
Stay with what you know for sure. Your house is paid off and you know that. The stock market gamble may go up or down, but you don't know for sure.

I am gambling with only 15 percent of my income (401k invested in S&P index funds/lifecycle funds) which is money I am willing to risk if all goes TU. At least my house (being proudly paid off) will always be there keeping me warm, regardless how the market ponzi schemes pan out.
__________________
DAYDREAMER is offline   Reply With Quote
Old 01-12-2009, 01:51 PM   #19
Thinks s/he gets paid by the post
jIMOh's Avatar
 
Join Date: Apr 2007
Location: Milford, OH
Posts: 2,085
what is your current tax situation? What bracket are you in? What are the projected tax savings of doing this?
__________________
Light travels faster than sound. That is why some people appear bright until you hear them speak. One person's stupidity is another person's job security.
jIMOh is offline   Reply With Quote
Old 01-12-2009, 01:59 PM   #20
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Frankly, if we had two COLA'd pensions which met all of our living expenses, I have no idea why I'd want to risk my house on future stock market performance when we don't need the growth (AND RISK) of stocks to allow us to retire.

Come to think of it, if we were in that situation I'm not sure how much I'd be in stocks *period*, with borrowed money or otherwise.
__________________

__________________
"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
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
How Long Should Refi Processing Take? tgotch Other topics 4 01-05-2009 08:47 PM
refi rental properties? knucklehead 61 FIRE and Money 0 12-08-2008 08:57 PM
Refi Question jimnjana FIRE and Money 5 11-28-2008 12:28 PM
Do you always have to pay for title insurance on a refi? cardude FIRE and Money 9 01-18-2008 09:23 AM
Re: REFI Cut-Throat Other topics 13 11-25-2004 08:24 AM

 

 
All times are GMT -6. The time now is 06:08 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.