Betting your home against Wall Street

[jumpstart]

Is this "our" Rich?

Ask the Expert: Betting your home against Wall Street - Jul. 19, 2007

[W2R]

There have to be two or more men named Rich in Tampa.... but could it be?

[Webzter]

No way. with an idea like that, if that guy signed up here he'd be poor_in_tampa

[cute fuzzy bunny]

Was he wearing a fez?

[Patrick]

There's someone on this board who actually does this, but it's not Rich.

[cute fuzzy bunny]

Lots of people do it, its basically mortgage arbitrage and the foundation for the usual "should I pay of my mortgage" discussion...

[old woman]

Quote:

Originally Posted by cute fuzzy bunny Lots of people do it, its basically mortgage arbitrage and the foundation for the usual "should I pay of my mortgage" discussion...

I did it last August because my mortgage was a HELOC that was prime -.75 so it got too high. I refinanced it from a place that paid my fees but I had to borrow 180K to get them to do it free. I only wanted to owe about 66K but I took the 180K paid off my HELOC and had 114K leftover. I had a choice then between paying down the 180K mortgage or investing the money. If I paid down the loan I would still have the monthly payment to make. So I decided to put it in mutual funds I have made about 31K on them since August, withdrew 5K so I have about 140K in my mutual funds now. I could take it out and pay down the mortgage but I would still have the monthly payments. It is a 15 year mortgage so the payments are pretty high but I have a job. If I didn't have a job I could sell a little mutual funds to make the payments. If my investments keep growing when they get to 170 or so I might pay off the mortgage since my balance is down to 176 and going down 600 per month.

[theoldwizard]

Quote:

Originally Posted by old woman I did it last August ...

Your name should be old SMART woman !

If I needed the money (or was in a similar situation) I would certainly seriously consider doing it. There are many mutual funds that have 10% return averages for 5 and 10 years.

I know, I know, "Past performance ..."

[cute fuzzy bunny]

There are two sides to this. One is if you're still earning a wage, presumably enjoying raises and wage adjustments, or you're getting a cola'd pension...you've got a pretty different picture from someone ER'd and living off a portfolio. One side has an income source thats available to pay the bills, the other is taking on a lot of risk to arb a point or two of income.

The second piece is that statistically most people move within 7 years, a vast majority within 10. You quite likely could hit a downturn that lasts the life of your arb term. Then on the next leg of it its hard to say what mortgage rate you'd be able to get. So you might lose 20-50% of your "investment" and then no longer be able to get a satisfactory rate to recover that. Unless you plan to sit still for 15-20 years, the approximate term of a nearly certain gain in equities, you're sourcing more risk.

As an accumulator, this makes some sense to try, as in addition to having a growing income source working against an inflation nibbled loan, you probably need the long term leverage to have a shot at ER. On the other hand, as an ER, both your portfolio and the loan are being equally nibbled by inflation, you're increasing your withdrawal and hence your taxes and your failure risk.

Further, without the need to pay a mortgage, most ER's could get by on peanuts through a downturn and could take more risks (and gains) on their investments. Not so with the leveraged ER...you'd still be selling shares into the downturn to pay the big bills.

[old woman]

I still have the job raises don't really happen just once every 3 years and I am 59 but I can still adjust my retirement age if I lose money. After retirement I will only have SS and my live savings so reducing expenses to live on SS would be a good idea so investment income is extra fun money.
I will move when I retire so the loan will be gone I will get enough for the next house or pay it from investments.

[Rich_by_the_Bay]

Just stumbled on this, and heard my name in vain.

No, it wasn't me. But I'm gonna find that other "Rich" in Tampa and sue his bones for using my name. After the lawyer takes 30%, I should have enough to retire.

BTW, paid off my mortgage a year ago. Great idea, til we bought an RV .