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Old 07-19-2021, 09:24 AM   #121
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"Arbitrage and leveraging mortgage debt" reminds me of the guy who tells you that every time he leaves the casino, "he won".

Having an under 3% mortgage offset by TIPS returning inflation (currently ~5%) + 2% seems like a good idea to me, but YMMV.
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Old 07-19-2021, 09:54 AM   #122
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"Arbitrage and leveraging mortgage debt" reminds me of the guy who tells you that every time he leaves the casino, "he won".
Your memory is playing tricks on you then.

There's no comparison to a gambler. If anything, it's just the opposite, with the odds historically being very much in favor of the mortgage holder at these low interest rates (the mortgage holder is more like the house than they are the gambler).

Again, pay it off if you want, your call. But a false statement is still a false statement, and doesn't defend your position (other reasons may, but not that one).

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Old 07-19-2021, 10:19 AM   #123
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The risk with any mortgage is getting foreclosed on if you don't make the monthly payments. From that standpoint, a 15 year mortgage is riskier, because your required payment is higher. They don't let you make a smaller payment if you can't come up with the entire nut.

Keep your money out of the house unless & until you can pay it off entirely.
For someone who is squeaking by or still in the savings/earning mode without a large emergency fund or accessible saving...ok, sure, stick with the 30.

But for the vast majority here, and for 100% of those for whom paying in full is an option, then a 15 year is a good middle ground if the rates are worth the bother of the refi.

The risk is about zero for this population.
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Old 07-19-2021, 11:14 AM   #124
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The risk with any mortgage is getting foreclosed on if you don't make the monthly payments. From that standpoint, a 15 year mortgage is riskier, because your required payment is higher. They don't let you make a smaller payment if you can't come up with the entire nut.

Keep your money out of the house unless & until you can pay it off entirely.
You can get foreclosed on if you don't make your property tax payments. In some states, you can lose your fully paid off home in a lawsuit. Some asset protection lawyers recommend stripping the equity out of your home as a form of asset protection.

We have our mortgage payments set up on auto-pay. In my list of things to worry about in my life, getting foreclosed on because the auto-pay doesn't go through on time one month doesn't break the top 100. As others have posted, in this forum most who have mortgages have the money to pay them off and aren't worried about losing the house due to lack of funds.
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Old 07-19-2021, 08:01 PM   #125
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But this (and many of the other mortgage) thread(s) are basically about having a mortgage because you have the money available to pay it off. It's arbitrage. So there's no risk of foreclosure.
BINGO!

Sleep well at night = knowing you can pay off the mortgage any time you want, with one call to your stockbroker.
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Old 07-19-2021, 08:11 PM   #126
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Doesn't the arbitrage play require you to match your 30 year, 3.6% mortgage (which seems a bit high these days) against similar risk, fixed income assets (like Bonds, CDs, etc) in your "investment portolio"?
No.

You match the 30 year mortgage term with the same 30 year period of investment portfolio returns.

The risk in the mortgage is, as we keep saying, failing to make the monthly payments. Even if your "investment portfolio" is no more than the initial mortgage amount, you've got more than enough time to let the long-term compounding investment returns cover the monthly mortgage payment.

I would say that there is no doubt that a reasonable investment portfolio is going to return much more than a 2.5% mortgage over the next 30 years.
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Old 07-19-2021, 08:27 PM   #127
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Doesn't the arbitrage play require you to match your 30 year, 3.6% mortgage (which seems a bit high these days) against similar risk, fixed income assets (like Bonds, CDs, etc) in your "investment portolio"?

Otherwise, this is not really arbitrage but just leveraging debt to invest in equities, in which case it's similar to borrowing, at low interest rates, to invest in equities which aren't riskless like using a margin loan to buy stock. It raises the gadfly retort against leveraging a mortgage: would you take out a mortgage against a fully paid house (or take a HELOC) to buy securities (though some might do that fully aware of the risks they're taking).
Yes, you're right (IMO). My current mortgages are at 3.75% and 2.875%. The first one I used the cash freed up to buy a couple of rentals (mortgage free). They've consistently returned over 5%, and are now up to 8% return. I'm pretty happy with that play.

The newer one (2.875%) I'm putting the money in CD ladders. I'm definitely losing out currently, but I'm confident that over the remaining 28.5 years of the mortgage (I'll die before it's paid off) the CD rates will significantly beat the mortgage rate, even including taxes. It's a bet, but one I'm comfortable with.

What I'm not comfortable with is leaving that money sitting in a illiquid asset like a house. I realize others don't feel the same way, but that's me. So in answer to your last question, absolutely yes.
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Old 07-20-2021, 08:33 AM   #128
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No.

You match the 30 year mortgage term with the same 30 year period of investment portfolio returns.

The risk in the mortgage is, as we keep saying, failing to make the monthly payments. Even if your "investment portfolio" is no more than the initial mortgage amount, you've got more than enough time to let the long-term compounding investment returns cover the monthly mortgage payment.

I would say that there is no doubt that a reasonable investment portfolio is going to return much more than a 2.5% mortgage over the next 30 years.
I'll have to disagree with your view that you match the interest rate of a 30 year mortgage term with the 30 year returns from your investment portfolio. If you have cash, bonds or fixed income securities in your portfolio that are well below the interest rate of the mortgage it makes sense to pay off the mortgage and be done with it -- aren't you actually losing money as a result of the negative spread? That would be "negative arbitrage", such as borrowing on a 3.6% mortgage interest rate to invest in 2.00% interest paying, bond/fixed rate investments in your portfolio.

One of the compelling reasons of why I kept a mortgage over the years was because the payments were tax-affected, so my real interest rate was considerable lower than the mortgage rate of interest. But the spread between my real rate of interest on my mortgage (now it's coupon rate) and the interest rate on my CDs, cash or bonds has now tipped in favor of paying off the mortgage because I no longer itemize or tax-affect my mortgage payments. Though I hadn't thought about the TIPS position and deal mentioned above by daylatedollarshort.

I think you underweight the risks with keeping the mortgage and overweight the gains and risk of having an investment porfolio that may have its growth primarily as a result of having a strong position in equities. It's not just payment risk you should be concerned with regarding the mortgage, but perhaps you might be better off from a Sequence of Returns standpoint --if we go into an extended bear market -- with not having to pay mortgage debt since being mortgage-debt-free reduces your need to increase the percentage levels of draw downs from your investment portfolio if it's primarily used for living expenses.

Perhaps, I'm making things more complicated and over-thinking the situation, but I doubt it's as simple as looking at your mortgate interest rate and it's maturity and comparing it to the total returns of an investment portfolio ove the same period-- seems like that's an apple ot oranges comparison, stacked in favor of borrowing/keeping the mortgage.
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Old 07-20-2021, 11:36 AM   #129
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But the spread between my real rate of interest on my mortgage (now it's coupon rate) and the interest rate on my CDs, cash or bonds has now tipped in favor of paying off the mortgage because I no longer itemize or tax-affect my mortgage payments. Though I hadn't thought about the TIPS position and deal mentioned above by daylatedollarshort.
You have to have bought TIPS years ago to get those kind of rates. I-bonds are paying more than most mortgage rates these days. I-bonds have limits on how much you can buy each year, though there are some ways to stretch those limits a bit. TIPS are pretty pricey right now but if high inflation continues, with a locked in low, fixed mortgage rate that arbitrage may still work.

One article I read suggested buying stocks with dividends that pay more than 2.6%, which is about what 30 year mortgage rates have dropped to this week.

If your investments return 2% and you have a 2.7% mortgage for $200K, you may lose $1.4K in a given year (.7% X $200K), which doesn't seem like a huge risk to me, but YMMV. With the kind of funds most people need to retire early here, often in the millions of dollars, and how many here invest in a stock market that historically may go 50% or more in a given year, losing money due to mortgage arbitrage seem like a pretty minor retirement factor.

I saved more than $1.4K in a year by changing where I shopped for groceries. Yet I don't see posts that say I sleep well at night and I can finally retire now because I changed where I grocery shop, yet the dollars saved may be the same as one could get from paying off a mortgage and potentially not losing money on the arbitrage.
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Old 07-20-2021, 12:26 PM   #130
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Paying off the mortgage is not purely a math question. It is also a question of mindset. Making the difference between borrowing at 2.5% and earning 2.8% on a dividend portfolio might not make a difference to some people. They might say that 0.3% is a fee to SWAN.
Asking the question a different way. If your house was now paid-for, free and clear, would you take out a mortgage and invest the proceeds??
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Old 07-20-2021, 12:58 PM   #131
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You have to have bought TIPS years ago to get those kind of rates. I-bonds are paying more than most mortgage rates these days. I-bonds have limits on how much you can buy each year, though there are some ways to stretch those limits a bit. TIPS are pretty pricey right now but if high inflation continues, with a locked in low, fixed mortgage rate that arbitrage may still work.

One article I read suggested buying stocks with dividends that pay more than 2.6%, which is about what 30 year mortgage rates have dropped to this week.

If your investments return 2% and you have a 2.7% mortgage for $200K, you may lose $1.4K in a given year (.7% X $200K), which doesn't seem like a huge risk to me, but YMMV. With the kind of funds most people need to retire early here, often in the millions of dollars, and how many here invest in a stock market that historically may go 50% or more in a given year, losing money due to mortgage arbitrage seem like a pretty minor retirement factor.

I saved more than $1.4K in a year by changing where I shopped for groceries. Yet I don't see posts that say I sleep well at night and I can finally retire now because I changed where I grocery shop, yet the dollars saved may be the same as one could get from paying off a mortgage and potentially not losing money on the arbitrage.
Fair points. We can, however, I think agree that whatever camp on the pay-off mortgage crowd divide you're lodged, it's not going to make a material, financial difference for those with the ability to retire early and have surplus funds to retire the mortgage at any time without tripping other issues.

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Paying off the mortgage is not purely a math question. It is also a question of mindset. Making the difference between borrowing at 2.5% and earning 2.8% on a dividend portfolio might not make a difference to some people. They might say that 0.3% is a fee to SWAN.
Asking the question a different way. If your house was now paid-for, free and clear, would you take out a mortgage and invest the proceeds??
Harley answered that question in the affirmative above. And I thought there once was a well-known poster here who several years ago said he was going to borrow/take out a mortgage and invest in Berkshire Hathaway Class A stock with the proceeds. Nonetheless, in both cases I believe they acknowledge the risk involved in such an undertaking.
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Old 07-20-2021, 01:53 PM   #132
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Paying off the mortgage is not purely a math question. It is also a question of mindset. Making the difference between borrowing at 2.5% and earning 2.8% on a dividend portfolio might not make a difference to some people. They might say that 0.3% is a fee to SWAN.
Asking the question a different way. If your house was now paid-for, free and clear, would you take out a mortgage and invest the proceeds??
For me and some other posters here, yes it is purely a math question.

Yes, many posters here with paid off homes do get mortgages or refinance with cash out when rates look good. With mortgage rates currently under 3% and inflation at 5%, a low interest rate, fixed mortgage may be a good, future inflation hedge. If not, the mortgage can always be paid off or refinanced with a no point, no fee mortgage, if rates drop even lower. In my case we have some non-COLA pensions and having a mortgage reduces the impact of potential inflation on our retirement finances. The pensions won't go up over time but neither will the mortgage. Actually the mortgage expense has been reduced because we refinanced twice so far at no cost to us mortgages, so our disposable income has gone up. And I'm not losing money on the arbitrage because I bought a lot of TIPS when rates were higher.
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Old 07-20-2021, 02:40 PM   #133
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...
Asking the question a different way. If your house was now paid-for, free and clear, would you take out a mortgage and invest the proceeds??
Yes. Absolutely. Have done it (if you consider refinancing with funds available for a pay-off instead). Will do it again in the very near future (purchased home with a Line of Credit from broker, will lock in a mortgage soon. Could have paid cash.) It has paid off well for me.

Any other questions?

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Making the difference between borrowing at 2.5% and earning 2.8% on a dividend portfolio...
Dividends are not the only value in a portfolio. Money is fungible, it's all money, growth and divs.

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Old 07-20-2021, 02:49 PM   #134
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For me and some other posters here, yes it is purely a math question.

Yes, many posters here with paid off homes do get mortgages or refinance with cash out when rates look good. With mortgage rates currently under 3% and inflation at 5%, a low interest rate, fixed mortgage may be a good, future inflation hedge. If not, the mortgage can always be paid off or refinanced with a no point, no fee mortgage, if rates drop even lower. In my case we have some non-COLA pensions and having a mortgage reduces the impact of potential inflation on our retirement finances. The pensions won't go up over time but neither will the mortgage. Actually the mortgage expense has been reduced because we refinanced twice so far at no cost to us mortgages, so our disposable income has gone up. And I'm not losing money on the arbitrage because I bought a lot of TIPS when rates were higher.
Is it really just purely a math question for you? I suspect for almost all of us, it's not just purely a math question. Behavorial economics teaches us that it's not all about math and that we humans place more weight on avoiding losses than generating gains. So, I wouldn't be so dismissive about people wanting to sleep better when their mortgage is paid off. Perhaps you're different from most of us, and perhaps if you won the lottery the last thing on your mind would be paying off that mortgage -- I know it would be the first thing that would run through my mind even if my interest rate were 1.85 % and math would dictate to hold on to that mortgage.
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Old 07-20-2021, 03:23 PM   #135
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Is it really just purely a math question for you? I suspect for almost all of us, it's not just purely a math question. Behavorial economics teaches us that it's not all about math and that we humans place more weight on avoiding losses than generating gains. So, I wouldn't be so dismissive about people wanting to sleep better when their mortgage is paid off. Perhaps you're different from most of us, and perhaps if you won the lottery the last thing on your mind would be paying off that mortgage -- I know it would be the first thing that would run through my mind even if my interest rate were 1.85 % and math would dictate to hold on to that mortgage.
Whether it's pure math or not I think depends on each one's life experiences. I was homeless in 1968 living in a paid-for $350 car. I guess that made me hate debt and appreciate liquidity. It turned out OK. We own a house in FL and a house in IN, 3 vehicles, everything paid for, and a NW north of 4MM. Debt is just not in my wheelhouse, and I didn't need it to get where I am.
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Old 07-20-2021, 05:18 PM   #136
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So, I wouldn't be so dismissive about people wanting to sleep better when their mortgage is paid off.
I don't think that most of us pro-mortgage people are at all dismissive about people that prefer a paid off house. If that's what makes you happy, drive on. But when someone asks for opinions on the subject I assume they'd like more than one. And when (as often happens) someone says having a paid off house is a no brainer, pointing out the fallacy of that statement is not only good civic responsibility, it's fun.
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Old 07-20-2021, 05:35 PM   #137
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Paying off a house sounds great, until you are house rich and cash poor. I have a family friend, just turned 80 and living on a small pension and Social Security, just barely above Medicaid cap. Somewhat unfortunate as he misses out on some possible assistance programs. Fortunately he live frugally.

Sure, he has a paid for house but has little in savings and should a medical or other tragedy strike he has little to dip into.

He's one of those are against having debt, but now at a point he can't borrow at a reasonable rate as he doesn't have the income to qualify. With little other options perhaps a reverse mortgage will be in his future. But I understand the fees on those are outrageous and the amount of equity they will pull out is rather dismal. Hopefully he continues to have the money to pay his real estate taxes just so he doesn't end up in tax foreclosure and lose his fully paid for place.

He's very rural so selling and renting isn't a real possibility and he's a stubborn SOB who just says he wants to live in HIS place.

Anyway, an example where having a low rate mortgage and a portfolio that was 2x the return could actually improve his cash flow situation and be better prepared for a tragic event.
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Old 07-20-2021, 05:51 PM   #138
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Is it really just purely a math question for you? I suspect for almost all of us, it's not just purely a math question. Behavorial economics teaches us that it's not all about math and that we humans place more weight on avoiding losses than generating gains. So, I wouldn't be so dismissive about people wanting to sleep better when their mortgage is paid off. Perhaps you're different from most of us, and perhaps if you won the lottery the last thing on your mind would be paying off that mortgage -- I know it would be the first thing that would run through my mind even if my interest rate were 1.85 % and math would dictate to hold on to that mortgage.
Yes, it is just a math question for some of us. That has been answered in this thread alone, many times, by myself and others.

Pointing out math facts is being logical, not dismissive. No one here has criticized people who don't have a mortgage, but if the reasons they don't have one are illogical or not supported by math, that has been pointed out.
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Old 07-20-2021, 07:55 PM   #139
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Asking the question a different way. If your house was now paid-for, free and clear, would you take out a mortgage and invest the proceeds??
Yes, if I could get a cash-out mortgage for the same cost (fees & rate) as a non-cashout mortgage.

Those of us who are serial refinancers are essentially doing this. Every time you refi you start a new 30 year period. We've been in this house for 15 years, but have 29 1/2 years to go on the mortgage. Have always just refi'ed the current balance, because nowadays they charge a lot if you take cash out-- including rolling a HELOC balance into the loan.
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Old 07-20-2021, 08:08 PM   #140
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Is it really just purely a math question for you? I suspect for almost all of us, it's not just purely a math question.
But realize that most of us here are very atypical. This group of people has the ability to easily pay off their mortgage. Most people cannot pay off their mortgage, because they don't have the money. Those are the people who have an actual sleep-well-at-night issue.

If you have enough money that you can easily pay off the mortgage, SWAN issues are mostly all in your head. First world problem.
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