Refi payed off house to invest?

[grumpy]

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?

 

[Dennis]

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..
;->)

 

[W2R]

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... ).

 

[Maurice]

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?

 

[crazy connie]

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.

 

[73ss454]

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.

 

[FinanceDude]

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" ........

 

[Bestwifeever]

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-ticke...-the-Optimists-See-Hard-Economic-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.

 

[FIRE'd@51]

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.

 

[REWahoo]

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.

 

[haha]

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

 

[FIRE'd@51]

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.

 

[JPatrick]

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!

 

[Moemg]

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 ?

 

[Sam]

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

 

[Urchina]

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?)

 

[Animorph]

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.

 

[DAYDREAMER]

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.

 

[jIMOh]

what is your current tax situation? What bracket are you in? What are the projected tax savings of doing this?

 

[ziggy29]

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.

 

[Gardnr]

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.

Just curious, what broker is that?

 

[FIRE'd@51]

Just curious, what broker is that?

Check your PM's

 

[Nords]

Welcome to the club, Grumpy.

We did that in 2004 and we're refinancing to drop the interest rate down to 4.5%. We also did that to a smaller extent with our rental property (the 5.5% mortgage interest washed out the Schedule E passive income) in 2001 and bought Berkshire Hathaway "B" shares on sale in the $2200s.

The first issue-- you've already won the game in the third quarter and now you're just running up the score. You may not want the excitement to disturb your sleep at night.

The second issue-- if history & statistics are any indication, your stock picks will win over a 30-year mortgage. (Especially in a cheap equity index fund.) You might win over 20 years. You have about a 50% chance of winning over 15 years. Good luck over the shorter term. Are you or your spouse going to be annoyed if one or the other of you isn't around for the entire 30 years?

Third issue-- do you have any bonds or CDs that are paying less than the mortgage interest rate is costing you? If so then you're losing a little on each transaction and trying to make it up on volume.

Fourth, the nation's median length of residence is about seven years. Do you have any expectation of changing residences by then, let alone during the next 20 years?

Finally, the reason I mentioned Berkshire Hathaway is because last October I thought we were going to get an opportunity to buy more shares at that price. Not much fun to look at that seven-year chart.

 

[Rustic23]

Grumpy

Congratulations! It seems like you have found a new way to start a 'should I pay off the mortgage thread'

 

[DallasFH]

Would the dividend cover the payment?

We are in our 30s so it is not a big deal, but so far the dividend from VTI and VEU is more then the monthly payment. Only problem is that Bank of America only allow 50% Heloc on the house in Texas, which is $115K at 2.79%. Now if I could get that other 50% of the pay off house, it would go into the market also.
Thank goodness I could not, because it seem I don't know the pain of the DOW going to zero yet.