Covering a mortgage without losing your ass(ets).

[Nords]

Seven-year update.

Recap for those who [-]won't bother[/-] don't want to read the entire thread: The mortgage money we borrowed at 5.5% and invested in 2004 was up over 17% by 2005. Even as recently as Oct 2008 it was still up 5.3% APY.

Here's the loan's life-long average APY after each year:

1: 17.1%
2: 13.3%
3: 13.5%
4: 5.3%
5: 2.0%
6: 3.27%
7: 2.3%

Reinvested dividends are up to over 8% of the total, reflecting the fund's average yield. This year has been very volatile and it continues to achieve CD-like rates. Better hurry over the next 23 years to catch up...

In real life, last year we refinanced (yet again) down to 3.625% fixed for 30 years. Once again, I'm pretty sure that we won't see lower rates than that during the rest of my life. I might as well also say that I think this is our last refi, and this time I really really mean it, but my track record on that has been pretty poor.

Heh. I just realized that I have another blog post staring me in the face...

Disclosures & disclaimers: For those who are new to this thread, it's only an update. It's just seven years into a 30-year experiment and it's too soon to call the results. This is a niche investment situation that's probably only appropriate for those who are going to stay in their home for 30 years (or the rest of their lives), living off a COLA pension while investing the mortgage money in a long-term equity index. Volatility would exceed the sleep-at-night comfort level of most rational humans, perhaps even Vulcans. A portfolio's 30-year survival is influenced by the first few years of returns, and in this case they were wonderful. I'd hate to consider this experiment starting at the 2007 peak, but someone else can feel free to run the data. However some FIRECalc data runs indicate that a larger portfolio (even with its higher expenses of the mortgage payment) is more survivable than a smaller one, so an ER mortgage may actually be a good idea in some scenarios.
By the way, the credibility of your comments is directly related to the evidence that you've bothered to read the entire thread.

 

[Nords]

Eight-year update. You only need to read this post and the previous one, although some of the 2004 commentary is interesting... as is 2008-09.

The iShares small-cap value ETF (IJS) has been on a tear lately, reaching highs not seen since 2007 (and we all remember how that turned out). The shares have managed to pay a fairly consistent 1.2%-1.3% dividend over the years, too, so the reinvested shares now make up about 10% of the total.

Their after-tax APY is back up to 5.9%, handily beating the original mortgage rate of 5.5%. There were a few grim-looking years during the Great Recession, but there were also some great reinvested dividends.

In real life our mortgage has been refinanced a couple times to its current rate of 3.625%. I never saw that coming in 2004. This one won't be paid off until I'm 80, but I'd start the mortgage clock all over again if I could get another great deal.

As for the next 22 years, I don't know whether to cheer for high share prices (and capital gains) or low share prices (with reinvested dividends). It looks like the long-term probabilities are going to eke out a profit over the sequence of returns.

 

[Nords]

10-year update: 8.18% APY.

Read post #101 (two posts above this one) for the details of the analysis-- including the fine print. If you haven't been here for all ten years then it might even be worth your time to scroll back to the first post of this thread.

As we all know by now, one of the greatest risks to a retirement portfolio is the sequence of returns during the first 10 years of withdrawals. Mortgage arbitrage is probably subject to the same performance risks, and if so then this time it's beating the sequence-of-returns risk.

Today the interest rate on our (refinanced) mortgage is 3.625%. The equity premium is nearly 4.5%. Even if inflation runs at 3% we'll still be well ahead of the race.

One last disclaimer: I had a 20-year military career with reliable income, and now I have a reliable pension. That annuity income gives me the chance to maintain a high-equity portfolio (over 90%) and to engage in this highly risky mortgage arbitrage. This might also be a once-in-a-lifetime opportunity. If you're going to try this at home then be aware that it's volatile as well as financially risky.

I'm going to cap off this thread on this forum. I'll respond to comments here, but I'm going to restart the subject at MrMoneyMustache.com and eventually turn it into a blog post.

 

[pb4uski]

I do a similar comparison of our 15 year cash out refinance mortgage rate of 3.375% to the portfolio investment return of 10.60% per annum from our refinancing date to today. The investment return is from a Quicken investment performance report. AA is 60/34/6 stocks/fixed income/cash. Things would have to go sideways in a big way for me to lose on the arbitrage. Since my mortgage is only about 10% of our net worth it isn't a huge bet for me.