Author Topic: Equity shaming  (Read 9549 times)

boarder42

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Re: Equity shaming
« Reply #100 on: August 05, 2018, 10:45:00 AM »
I think a number of us are talking about different scenarios. Here's what I see being mentioned:

1. You plow all of your extra money into paying down the mortgage,
2. You invest some/build an emergency fund, and pay the mortgage down somewhat,
3. You make the minimum mortgage payments and plow all of your extra money into e-fund and investments, or
4. You make the minimum mortgage payments, plow all of your extra money into investments, and whenever your equity in the house goes up, take out a HEL on the increased equity and put all that money into investments as well.

I think the numbers are fairly clear that #3 is better than #1 or #2. My objection, and I think that of others, is #4. That's the thing that actually has increased risk from an economic standpoint, since bear markets, housing busts, and job loss tend to happen together, and being that highly leveraged increases both the upside and the downside pretty dramatically.

You can object to #4 all you want but if you look at history. If you could perpetually get 5% mortgages every 10years your safety in FIRE goes to 100% using a 4% swr plus PI payments not increased with inflation. Even if it were 7% you'd still be gaining safety.

So what you're objecting to hasn't happened before. More over a mortgage refinance can be timed. Not every market drop has been timed with a housing bubble bursting. For instance if the market would go into minor correction mode 10-20% here in the next couple years money would flock to bonds effectively lowering the interest rates again. This would allow a savvy person to take out equity thru refi or hel not a HELOC these aren't fixed. And invest it. Who the hell cares if the market continues down you already are buying at a discount with a low fixed rate.

Dicey

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Re: Equity shaming
« Reply #101 on: August 05, 2018, 03:01:47 PM »
In hindsight, the right thing to do 3 years ago was to take out HELOCs and invest the proceeds into out-of-the-money call options on Amazon.com. Would you be willing to take such a gamble now (losses are 100% if AMZN doesn't rise rapidly, and then you'd still have the debt)?

My point is you have to pick a risk tolerance for the proceeds from your loan. Consider the differences between:
1) buying out of the money stock options on tech companies,
2) investing in the S&P 500 (which Bogle expects to earn 4% for the next ten years)
3) an investment-grade corporate bond portfolio yielding 5%
4) treasuries yielding 3%

One more point - last time I checked, the interest rate for HELOCs is higher than the rate for a 30y mortgage. Think more like 5.5%-6% at the moment. This makes sense because the risk to the HELOC lender is higher than it was for the original lender; they have to share proceeds with the original lender in the event of liquidation. Also, don't forget to factor in significant application/closing costs not reflected in the interest rate.

https://www.lendingtree.com/home/home-equity/heloc/

Last point, I can think of some scenarios where this wouldn't play out. Particularly, if inflation becomes high, investment returns will stink (as they did in the 1970s) and housing prices might rise. If you get foreclosed, you'd then face the prospect of paying 2-4x more for your next house than you paid for your original house.

No mustachian worth their salt invests that way. No one is advocating they do so with their home equity. Don't know where you got that notion.

You are close-ish on #3, but why are you assuming what Bogle opines is gospel? Truth is: No One Knows with 100% Certainty.

And this: "out-of-the-money call options on Amazon.com" who the fuck here does that?

As for your last sentence: lots of people got foreclosed on in 2008-ish. Many of them are homeowners again. They're not paying "2-4x more." Finally, If ypu have a shitload of money in investments, you can make enough mortgage payments to avoid foreclosure, even if you lose your job. Hmmm, that's kind of the whole damn point, isn't it?

FIreDrill

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Re: Equity shaming
« Reply #102 on: August 05, 2018, 03:17:50 PM »


In hindsight, the right thing to do 3 years ago was to take out HELOCs and invest the proceeds into out-of-the-money call options on Amazon.com. Would you be willing to take such a gamble now (losses are 100% if AMZN doesn't rise rapidly, and then you'd still have the debt)?

My point is you have to pick a risk tolerance for the proceeds from your loan. Consider the differences between:
1) buying out of the money stock options on tech companies,
2) investing in the S&P 500 (which Bogle expects to earn 4% for the next ten years)
3) an investment-grade corporate bond portfolio yielding 5%
4) treasuries yielding 3%

One more point - last time I checked, the interest rate for HELOCs is higher than the rate for a 30y mortgage. Think more like 5.5%-6% at the moment. This makes sense because the risk to the HELOC lender is higher than it was for the original lender; they have to share proceeds with the original lender in the event of liquidation. Also, don't forget to factor in significant application/closing costs not reflected in the interest rate.

https://www.lendingtree.com/home/home-equity/heloc/

Last point, I can think of some scenarios where this wouldn't play out. Particularly, if inflation becomes high, investment returns will stink (as they did in the 1970s) and housing prices might rise. If you get foreclosed, you'd then face the prospect of paying 2-4x more for your next house than you paid for your original house.

No mustachian worth their salt invests that way. No one is advocating they do so with their home equity. Don't know where you got that notion.

You are close-ish on #3, but why are you assuming what Bogle opines is gospel? Truth is: No One Knows with 100% Certainty.

And this: "out-of-the-money call options on Amazon.com" who the fuck here does that?

As for your last sentence: lots of people got foreclosed on in 2008-ish. Many of them are homeowners again. They're not paying "2-4x more." Finally, If ypu have a shitload of money in investments, you can make enough mortgage payments to avoid foreclosure, even if you lose your job. Hmmm, that's kind of the whole damn point, isn't it?

Regarding Bogles prediction.

I'm pretty sure Bogles prediction is inflation adjusted which means we are talking about 6.5% to 7% average return over the next 10 years if we want to compare it to non inflation adjusted interest rates on a mortgage.  For some people that's a 3.5 to 4% spread.  Making a 10 year return difference of up to 62k based off a 100k initial invest if you were to compare 3% mortgage interest rate pay off to 7% annual return via stocks.



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clarkfan1979

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Re: Equity shaming
« Reply #103 on: August 05, 2018, 03:40:18 PM »
When it comes to the 2008-2009 housing crisis in which people were foreclosed, I don't think it applies to the typical person on this website. I have a "friend" who lost everything in 2010.

They bought about 20-25 properties totaling 144 units with 0% down on pretty much all of them. He claims that he got deals, but I don't think he did. The rules were very loose and he bought as much as he could as fast as he could. He even admitted to drafting up fake leases to make his income look bigger so he could buy more. He never had any real cash because he was a spender and never really had any real money in the bank. He would take expensive trips to Las Vegas, which he justified by his, "very successful business".

Most of his tenants were lower income. Once the economy tanked they are the first to lose their job. They stopped paying rent and he lost everything.

He and his wife claim that everyone lost their ass in 2010. However, that's not true. I had one rental at the time and it did fine. My step-father has a 45 unit apartment that did terrific in 2010 because the people who lost their house were moving into his apartment.

Yes, some people were foreclosed in 2010. Maybe even some who belong to this forum. However, they learned from it and are not likely to repeat it during the next recession. You don't need to pay off your mortgage to avoid foreclosure. You can still buy rentals with 25% down and still have plenty of safety. This is much different than 2002-2006 when people were buying rentals with 0% down and no income verification.





DreamFIRE

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Re: Equity shaming
« Reply #104 on: August 05, 2018, 03:55:27 PM »
Regarding Bogles prediction.

I'm pretty sure Bogles prediction is inflation adjusted which means we are talking about 6.5% to 7% average return over the next 10 years if we want to compare it to non inflation adjusted interest rates on a mortgage.

Real return factors in inflation.

Jack projected nominal to zero "real" returns over the next decade.  He made that projection 3 years ago when the following MMM thread was created:

https://forum.mrmoneymustache.com/investor-alley/%27nominal-to-zero-returns%27-over-coming-decade-jack-bogle/

FIreDrill

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Re: Equity shaming
« Reply #105 on: August 05, 2018, 04:15:52 PM »

Regarding Bogles prediction.

I'm pretty sure Bogles prediction is inflation adjusted which means we are talking about 6.5% to 7% average return over the next 10 years if we want to compare it to non inflation adjusted interest rates on a mortgage.

Real return factors in inflation.

Jack projected nominal to zero "real" returns over the next decade.  He made that projection 3 years ago when the following MMM thread was created:

https://forum.mrmoneymustache.com/investor-alley/%27nominal-to-zero-returns%27-over-coming-decade-jack-bogle/

Well I sure am glad I kept investing over the last 3 years lol.  I recently saw an article from 2017 where he predicted 4% real returns not including dividends.  So more around 6%, at least that's the way I read it.

https://www.cnbc.com/2017/11/20/jack-bogles-5-bold-investment-predictions-for-2018-and-beyond.html

I actually agree that the market will slow and I hope it does. If we could get a correction or a fairly flat 7 to 10 year period that just makes it more advantageous to invest over that time. Assuming we see a decade of solid returns after the decade of low returns. Invest through the bear and ride out the bull baby!

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« Last Edit: August 05, 2018, 04:51:13 PM by FIreDrill »

Telecaster

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Re: Equity shaming
« Reply #106 on: August 05, 2018, 04:46:33 PM »
In hindsight, the right thing to do 3 years ago was to take out HELOCs and invest the proceeds into out-of-the-money call options on Amazon.com. Would you be willing to take such a gamble now (losses are 100% if AMZN doesn't rise rapidly, and then you'd still have the debt)?

I wouldn't have taken that gamble then, and I wouldn't take it now. 

The whole decision of paying down the mortgage vs. investing is based on the predictability long term stock returns combined with low fixed mortgage rates.  If either one of those legs goes away, then it doesn't make sense.  For example, if we're talking about the short term, or if interest rates are high or variable then decision making process is completely different. 

FWIW, the original article was discussing taking out equity to invest in real estate.  Real estate investing (presumably) is much more predictable because it is based on cash flows, which are easier to project in the short term than stock returns.  I'm not much a real estate investor, but I did buy a rental house in 2010 using a HELOC for the down payment, so I get the point about using existing equity to buy more real estate.    I did pay off the HELOC over a few years.  In hindsight, I should have done it a few more times, but that's not where I was at the time. 
 

TomTX

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Re: Equity shaming
« Reply #107 on: August 05, 2018, 07:14:42 PM »
Which in my view is the strongest argument you can make for not paying down the mortgage.    Paying down the mortgage gives you security only when the mortgage is finally paid off.  If you become delinquent at any point the bank will repossess regardless of how many extra payments you made.

Even if the bank forecloses on your home, don't you get the equity that you've paid into the home back?

Ha. The bank has no incentive to get the best price for your house in a foreclosure. They just need enough to cover the amount you owe plus costs. And enough effort to say they tried.

talltexan

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Re: Equity shaming
« Reply #108 on: August 06, 2018, 07:55:11 AM »
One dimension that's missing is: how much to spend on your house in the first place? Should you buy more house than you need simply because of the benefits that leveraging extra capital for investing can buy you?

boarder42

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Re: Equity shaming
« Reply #109 on: August 06, 2018, 08:12:47 AM »
One dimension that's missing is: how much to spend on your house in the first place? Should you buy more house than you need simply because of the benefits that leveraging extra capital for investing can buy you?

it could in theory work out assuming you buy at the right time and the right price and get market appreciation.  But this is heavily market timing and you'd need to really know your local market.  I bought bigger than i needed b/c of the location and the price was right.  my extra 600 a year in energy costs currently far underweight the equity increases i've seen in my home.  Plus my location can't be beat for what i enjoy doing in life.  If i'd waited for the right sized house in the location i wanted it would have been 150k to 200k more in cost due to what the market did and when the houses that met all my criteria for energy efficiency, size and location hit the market.

but again i didnt buy a larger house expecting this to happen its just a nice outcome.  I bought it b/c i wanted the location the price was right and rates were crazy low.  3.625% for 30 year then was able to drop it to a 3.25% with a refi at the bottom.  i got lucky. 
« Last Edit: August 06, 2018, 08:26:52 AM by boarder42 »

Retire-Canada

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Re: Equity shaming
« Reply #110 on: August 06, 2018, 08:16:03 AM »
One dimension that's missing is: how much to spend on your house in the first place? Should you buy more house than you need simply because of the benefits that leveraging extra capital for investing can buy you?

I wouldn't. There are lots of downsides to having too much house. You either live in an area with a HCOL and high house prices/potential equity or you pay a lot less for a house and would then have more $$ to invest anyways.

partgypsy

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Re: Equity shaming
« Reply #111 on: August 06, 2018, 08:33:34 AM »
I think the mistake I see, is that sometimes people buy bigger, nicer, more expensive houses than they need, because it is an "investment". It is an investment, but only when you sell it. And maybe you enjoy the nice view/kitchen/swimming pool/addition, but you are spending your money on paying for that which is really just inflating your standard of living and is NOT a good return/investment on your money, than in investments that are more liquid and give you more return. A house is only an investment when you sell it.

My view. I want to live in a home that I can afford, is maintained, that is a lower percentage of my spending costs than average household housing spending. 2nd, a goal for me to have it paid off sooner than later. I don't care what the averages are. For me to have a paid off home, would be a huge, increase in my quality of life. While I am paying it off sooner I am still paying around 21% of my spending on housing (including prop taxes, insurance).

You should put time and money to make a home you love and is useful, like being clean, having a garden, etc because that DOES affect your quality of life. But whatever your changes, improvements, do those things as frugally as possible, because that's NOT where the return is. Put your big bucks into other investments, such as stocks or even other piece of real estate you can rent/sell and get an actual return on. 
« Last Edit: August 06, 2018, 08:36:25 AM by partgypsy »

mathlete

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Re: Equity shaming
« Reply #112 on: August 06, 2018, 08:54:33 AM »
Amazing.

Alan Greenspan was a cheerleader (at least, as much as a Fed Chair can be) for tapping home equity. Or as he termed it, "previously unrecognized borrowing capacities". And the banks listened. I remember opening my first bank account when I was 15 or 16. Pre-crisis. Everywhere in the branch, I saw, "HELOC!" Commercials lit up the airwaves, encouraging you to borrow against your home equity.

Needless to say, Greenspan's behavior on this has aged very poorly.

Irrelevant anecdote because 99.999999% of all people taking a HELOC did NOT invest those funds in the market.  Instead, they bought stuff like fancier kitchens, palatial poop rooms, big trucks, or vacations.

Greenspan's comments came in late October 2004. If you borrowed at the prime rate of the time and had zero transaction costs, your margin is less than 1% after ten years, assuming you weathered the financial crisis.

There is an excellent argument to be made, that you're better off in a crisis with beaten down stocks than you are with beaten down home equity. Because at least you can sell the stocks (at a loss) to get cash if you need it. As others have pointed out, borrowing against your diminish equity is tough in a time of high joblessness and tight lending standards would be very difficult.

But in the 'borrow and invest' scenario, if things go south and you need cash, it will at least be in part to service the additional debt you took out.

If you had done as the Forbes author wants, invested in rentals, then you might be in an even tighter bind. Two diminished assets with loans against them, and flat rents.

Intuitively, you would expect 'borrow and invest' to work out in the borrower's favor most of the time. If an asset returns X% historically, and you can borrow at Y% where X > Y, then you should come out ahead. But I like to look at it holistically. Volatility of returns is a real thing, and it is bigger over shorter time horizons. So the decision is a personal one involving appetite for equities. I don't view it as simply as, "always leverage".

boarder42

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Re: Equity shaming
« Reply #113 on: August 06, 2018, 08:57:06 AM »
I think the mistake I see, is that sometimes people buy bigger, nicer, more expensive houses than they need, because it is an "investment". It is an investment, but only when you sell it. And maybe you enjoy the nice view/kitchen/swimming pool/addition, but you are spending your money on paying for that which is really just inflating your standard of living and is NOT a good return/investment on your money, than in investments that are more liquid and give you more return. A house is only an investment when you sell it.

My view. I want to live in a home that I can afford, is maintained, that is a lower percentage of my spending costs than average household housing spending. 2nd, a goal for me to have it paid off sooner than later. I don't care what the averages are. For me to have a paid off home, would be a huge, increase in my quality of life. While I am paying it off sooner I am still paying around 21% of my spending on housing (including prop taxes, insurance).

You should put time and money to make a home you love and is useful, like being clean, having a garden, etc because that DOES affect your quality of life. But whatever your changes, improvements, do those things as frugally as possible, because that's NOT where the return is. Put your big bucks into other investments, such as stocks or even other piece of real estate you can rent/sell and get an actual return on.

correct its the only way some people can save money but on this site we're not the avg group of people we're better than the avg person we invest our money wisely and spend appropriately for what we value.  I think most on this site know their home is not an investment and do not look at it as such.  but for the avg person buying an overly large home when they have kids could be what then end up living off of when the downsize in retirement b/c they didnt save any other money.

mak1277

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Re: Equity shaming
« Reply #114 on: August 06, 2018, 09:15:37 AM »
My goal in life is not to build the biggest pile of money possible.  I accept that paying off my mortgage early was not optimal.  Despite this, I am very happy I paid off my mortgage.

So you're very happy you worked longer? And very happy you have less money?

I would never retire with a mortgage, so your assertion isn't relevant to me.

boarder42

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Re: Equity shaming
« Reply #115 on: August 06, 2018, 09:30:20 AM »
My goal in life is not to build the biggest pile of money possible.  I accept that paying off my mortgage early was not optimal.  Despite this, I am very happy I paid off my mortgage.

So you're very happy you worked longer? And very happy you have less money?

I would never retire with a mortgage, so your assertion isn't relevant to me.

so if someone offered you a 0% interest rate mortgage you'd say nah i'm not going to do that.

but you answered my question by not answering it - no you're not happy about either of those statements.
« Last Edit: August 06, 2018, 09:31:55 AM by boarder42 »

mathlete

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Re: Equity shaming
« Reply #116 on: August 06, 2018, 09:41:35 AM »
so if someone offered you a 0% interest rate mortgage you'd say nah i'm not going to do that.

but you answered my question by not answering it - no you're not happy about either of those statements.

Different utility curves. Maybe debt stresses mak out. In that case, paying off the mortgage to them would be akin to buying a luxury item that reduces stress. Worth working marginally longer for (in time horizons for which market returns beat the borrowing rate).

boarder42

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Re: Equity shaming
« Reply #117 on: August 06, 2018, 10:11:14 AM »
so if someone offered you a 0% interest rate mortgage you'd say nah i'm not going to do that.

but you answered my question by not answering it - no you're not happy about either of those statements.

Different utility curves. Maybe debt stresses mak out. In that case, paying off the mortgage to them would be akin to buying a luxury item that reduces stress. Worth working marginally longer for (in time horizons for which market returns beat the borrowing rate).

so if not owning a lifted f350 stresses someone out we should dedicate threads to this in this community and pat each other on the back for each inch of lift we put on it? no punch them in the face and try to show them the error of their stress.

ChpBstrd

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Re: Equity shaming
« Reply #118 on: August 06, 2018, 10:18:25 AM »
In hindsight, the right thing to do 3 years ago was to take out HELOCs and invest the proceeds into out-of-the-money call options on Amazon.com. Would you be willing to take such a gamble now (losses are 100% if AMZN doesn't rise rapidly, and then you'd still have the debt)?

My point is you have to pick a risk tolerance for the proceeds from your loan. Consider the differences between:
1) buying out of the money stock options on tech companies,
2) investing in the S&P 500 (which Bogle expects to earn 4% for the next ten years)
3) an investment-grade corporate bond portfolio yielding 5%
4) treasuries yielding 3%

One more point - last time I checked, the interest rate for HELOCs is higher than the rate for a 30y mortgage. Think more like 5.5%-6% at the moment. This makes sense because the risk to the HELOC lender is higher than it was for the original lender; they have to share proceeds with the original lender in the event of liquidation. Also, don't forget to factor in significant application/closing costs not reflected in the interest rate.

https://www.lendingtree.com/home/home-equity/heloc/

Last point, I can think of some scenarios where this wouldn't play out. Particularly, if inflation becomes high, investment returns will stink (as they did in the 1970s) and housing prices might rise. If you get foreclosed, you'd then face the prospect of paying 2-4x more for your next house than you paid for your original house.

No mustachian worth their salt invests that way. No one is advocating they do so with their home equity. Don't know where you got that notion.

You are close-ish on #3, but why are you assuming what Bogle opines is gospel? Truth is: No One Knows with 100% Certainty.

And this: "out-of-the-money call options on Amazon.com" who the fuck here does that?

As for your last sentence: lots of people got foreclosed on in 2008-ish. Many of them are homeowners again. They're not paying "2-4x more." Finally, If ypu have a shitload of money in investments, you can make enough mortgage payments to avoid foreclosure, even if you lose your job. Hmmm, that's kind of the whole damn point, isn't it?

I'm not sure I get your point. You're pretty sure investing home equity in Amazon options would be the wrong decision because "who... does that?", but do you claim to know what would provide a reliable spread? The portfolio of long-duration corporate bonds perhaps? An all-equity index perhaps? Can we assume future rates of return (or bond defaults) based on past performance?

FWIW my point was that one must predict winners and losers with this approach, and leverage ups the ante. In a Japan scenario, the equity investment returns less than the loan costs. In a 1972 scenario, the bond portfolio dramatically underperforms. In a 1928 scenario, equities, bonds, and real estate all lose much of their value while the cost of one's debts increase due to deflation.

In 2008-ish, a lot of mortgaged retirees or unemployed people had to decide whether to liquidate their equity and bond investments at 40% off fire sale prices to cover mortgage expenses or to lose all their home equity to foreclosure and keep as many shares/bonds as possible while hoping for a rebound. That's not a good position to be in, and of course it could happen again. Don't build a trap for yourself!

It's easy to assume past investment returns predict future returns, but the decision process for leveraged investments is different because one must consider the reliability of returns. Amazon call options have yielded huge returns for a decade, but I wouldn't call them reliable either.

mathlete

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Re: Equity shaming
« Reply #119 on: August 06, 2018, 10:42:03 AM »
so if not owning a lifted f350 stresses someone out we should dedicate threads to this in this community and pat each other on the back for each inch of lift we put on it? no punch them in the face and try to show them the error of their stress.

I'm not the biggest fan of face punches in general. People have different utility curves. Mine is different from a celebrity blogger's so I'm not going to measure everything I do against them. I think what this community can and does do really well, is help people figure out what their utility curve really is. In other words, saying something like, "You're spending XYZ money/value/effort on this, do you really value it at XYZ level when you consider ABC?"

Sometimes the answer to that question is still, "yes", and we should respect that.

Setting aside the fact that I think people (myself included) have made well-reasoned arguments against leveraging your home equity, I truly don't get this community's particular hang up on this subject.

People will beat you down over not leveraging your home into low interest debt that you'll maybe get a few percentage points of margin on. But you'll also get beaten down for investing in anything other than broad, vanguard index funds.

If historical returns are the argument for leveraging your home, they could also be used as an argument for investing in Berkshrie Hathaway stock rather than VTI or whatever. Berkshire is broadly diversified. They own a railroad, financial companies like insurance giants and mortgage brokers, retailers, restaurants, clothing companies, tech companies, etc. But Berkshire has a 50 year history of beating the S&P by 2X. Why don't people want to invest in Berkshire and retire earlier?

Dicey

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Re: Equity shaming
« Reply #120 on: August 06, 2018, 10:51:17 AM »
In hindsight, the right thing to do 3 years ago was to take out HELOCs and invest the proceeds into out-of-the-money call options on Amazon.com. Would you be willing to take such a gamble now (losses are 100% if AMZN doesn't rise rapidly, and then you'd still have the debt)?

My point is you have to pick a risk tolerance for the proceeds from your loan. Consider the differences between:
1) buying out of the money stock options on tech companies,
2) investing in the S&P 500 (which Bogle expects to earn 4% for the next ten years)
3) an investment-grade corporate bond portfolio yielding 5%
4) treasuries yielding 3%

One more point - last time I checked, the interest rate for HELOCs is higher than the rate for a 30y mortgage. Think more like 5.5%-6% at the moment. This makes sense because the risk to the HELOC lender is higher than it was for the original lender; they have to share proceeds with the original lender in the event of liquidation. Also, don't forget to factor in significant application/closing costs not reflected in the interest rate.

https://www.lendingtree.com/home/home-equity/heloc/

Last point, I can think of some scenarios where this wouldn't play out. Particularly, if inflation becomes high, investment returns will stink (as they did in the 1970s) and housing prices might rise. If you get foreclosed, you'd then face the prospect of paying 2-4x more for your next house than you paid for your original house.

No mustachian worth their salt invests that way. No one is advocating they do so with their home equity. Don't know where you got that notion.

You are close-ish on #3, but why are you assuming what Bogle opines is gospel? Truth is: No One Knows with 100% Certainty.

And this: "out-of-the-money call options on Amazon.com" who the fuck here does that?

As for your last sentence: lots of people got foreclosed on in 2008-ish. Many of them are homeowners again. They're not paying "2-4x more." Finally, If ypu have a shitload of money in investments, you can make enough mortgage payments to avoid foreclosure, even if you lose your job. Hmmm, that's kind of the whole damn point, isn't it?

I'm not sure I get your point. You're pretty sure investing home equity in Amazon options would be the wrong decision because "who... does that?", but do you claim to know what would provide a reliable spread? The portfolio of long-duration corporate bonds perhaps? An all-equity index perhaps? Can we assume future rates of return (or bond defaults) based on past performance?

FWIW my point was that one must predict winners and losers with this approach, and leverage ups the ante. In a Japan scenario, the equity investment returns less than the loan costs. In a 1972 scenario, the bond portfolio dramatically underperforms. In a 1928 scenario, equities, bonds, and real estate all lose much of their value while the cost of one's debts increase due to deflation.

In 2008-ish, a lot of mortgaged retirees or unemployed people had to decide whether to liquidate their equity and bond investments at 40% off fire sale prices to cover mortgage expenses or to lose all their home equity to foreclosure and keep as many shares/bonds as possible while hoping for a rebound. That's not a good position to be in, and of course it could happen again. Don't build a trap for yourself!

It's easy to assume past investment returns predict future returns, but the decision process for leveraged investments is different because one must consider the reliability of returns. Amazon call options have yielded huge returns for a decade, but I wouldn't call them reliable either.
Jlcollinsnh's Stock Series all the way, baby! Pretty sure her's never written anything close to advocating Amazon Call Options. Which, by the way, you can only see how it performed in hindsight. On that point, we can totally agree.

boarder42

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Re: Equity shaming
« Reply #121 on: August 06, 2018, 10:55:23 AM »
so if not owning a lifted f350 stresses someone out we should dedicate threads to this in this community and pat each other on the back for each inch of lift we put on it? no punch them in the face and try to show them the error of their stress.

I'm not the biggest fan of face punches in general. People have different utility curves. Mine is different from a celebrity blogger's so I'm not going to measure everything I do against them. I think what this community can and does do really well, is help people figure out what their utility curve really is. In other words, saying something like, "You're spending XYZ money/value/effort on this, do you really value it at XYZ level when you consider ABC?"

Sometimes the answer to that question is still, "yes", and we should respect that.

Setting aside the fact that I think people (myself included) have made well-reasoned arguments against leveraging your home equity, I truly don't get this community's particular hang up on this subject.

People will beat you down over not leveraging your home into low interest debt that you'll maybe get a few percentage points of margin on. But you'll also get beaten down for investing in anything other than broad, vanguard index funds.

If historical returns are the argument for leveraging your home, they could also be used as an argument for investing in Berkshrie Hathaway stock rather than VTI or whatever. Berkshire is broadly diversified. They own a railroad, financial companies like insurance giants and mortgage brokers, retailers, restaurants, clothing companies, tech companies, etc. But Berkshire has a 50 year history of beating the S&P by 2X. Why don't people want to invest in Berkshire and retire earlier?

this is where you're incredibly wrong - its not a few percentage points of margin.  its 7-8% for me personally with a 3.25% fixed rate mortgage for 30 years.  and even at today's current rates its 5-6% thats not just a small amount. 

berkshire is a 50 year history with a leader who is close to dieing.  while they are diversified they arent as diversified as VTSAX likely not even close or they wouldnt be beating it by 2x over 50 years. 

The hang up on this fucking subject is its incredibly detrimental.  more detrimental than almost all the other crap people are pinching pennies for while they are stepping over the 100 dollar bills of just not paying a mortgage down and investing.  which takes no extra life energy. 

And in the context of this specific post when data is presented that shows it actually elminates SORR if done continuously you all still go nuh uh i dont care i hate debt ... then bring up retarded what if scenarios like the above amazon post and quoting what happend in japan - guess what if japan happens to the US TSM index 95% of this forum mortgage or not is fucked so who cares.

if you walk into a room and tell everyone they can have 100-500k more dollars everyone asks how.  then when you tell them you dont have to really do anything except click three buttons and stop sending cash to a mortgage and send it to VTSAX. you go thats not worth it -- half a million nah can't be worth it.  but hang drying these clothes is worth a nickle a week i tell you what!

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Re: Equity shaming
« Reply #122 on: August 06, 2018, 10:58:20 AM »
so if not owning a lifted f350 stresses someone out we should dedicate threads to this in this community and pat each other on the back for each inch of lift we put on it? no punch them in the face and try to show them the error of their stress.

Some people are focused purely on maximum investment returns, at a risk level that others aren't OK with.

Others are focused more on overall quality of life and mental stress factors into that.

If you're in the first group, then leveraging the hell out of your house and going for investment returns makes some amount of sense.

I'm obviously in the second group, and to me, my wife, and evidently a lot of other people in this thread, not having debt is worth an awful lot of mental sanity and is worth something to them.  I personally consider the stress of carrying debt around as worth about 2% extra - so if I could only earn 2% on something involving shoveling a lot of debt around, I'd generally not do it.  That's my decision, along with my wife, and we prefer it that way.

I expect most people on this forum wouldn't enjoy living out in rural farm country on a hillside of rocks.  We happen to greatly enjoy it, as it's quite close to family, and works well for how we like to spend our time.

Some of the stuff we do will, certainly, delay a "FIRE date."  We're OK with that.  Because we don't feel a need to retire as early as absolutely possible, as I enjoy how I earn money, and it lines up quite closely to what I'd do in my spare time anyway - but I don't have to pay for nearly as much hardware this way.

I'm a pilot.  I fly.  We like flying places in small planes.  It's a great way to travel, if not the most financially efficient, but it's within somewhat handwaving distance of commercial for a family of 4, if a good bit slower, more scenic, and more likely to divert due to weather.

We spend a good bit less than comes in, and try to focus on spending money efficiently instead of just doing what other people do, though living in a lower cost of area where not everyone is competing to have the fanciest toys makes that an awful lot easier.

Not everyone on the board is focused on the absolute earliest retirement and their calculation spreadsheets for it.  That's fine.

... besides, a lifted F350 is usually a silly choice.  If you're doing serious offroading, you're way better off with something shorter (an old Jeep is a lot of fun, for instance).  An F350 is a good tow beast and heavy stuff hauler, and putting a sky high lift on that makes both loading the bed and hooking up trailers trickier.  I've got 19.5" wheels and light truck tires on mine, which wear great, but the bed height is a bit higher than I'd prefer for some purposes.

Also, not everyone has a mortgage or can get one.  And interest rates on a HELOC are usually enough higher that it's not worth it from those.

boarder42

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Re: Equity shaming
« Reply #123 on: August 06, 2018, 11:01:08 AM »
In hindsight, the right thing to do 3 years ago was to take out HELOCs and invest the proceeds into out-of-the-money call options on Amazon.com. Would you be willing to take such a gamble now (losses are 100% if AMZN doesn't rise rapidly, and then you'd still have the debt)?

My point is you have to pick a risk tolerance for the proceeds from your loan. Consider the differences between:
1) buying out of the money stock options on tech companies,
2) investing in the S&P 500 (which Bogle expects to earn 4% for the next ten years)
3) an investment-grade corporate bond portfolio yielding 5%
4) treasuries yielding 3%

One more point - last time I checked, the interest rate for HELOCs is higher than the rate for a 30y mortgage. Think more like 5.5%-6% at the moment. This makes sense because the risk to the HELOC lender is higher than it was for the original lender; they have to share proceeds with the original lender in the event of liquidation. Also, don't forget to factor in significant application/closing costs not reflected in the interest rate.

https://www.lendingtree.com/home/home-equity/heloc/

Last point, I can think of some scenarios where this wouldn't play out. Particularly, if inflation becomes high, investment returns will stink (as they did in the 1970s) and housing prices might rise. If you get foreclosed, you'd then face the prospect of paying 2-4x more for your next house than you paid for your original house.

No mustachian worth their salt invests that way. No one is advocating they do so with their home equity. Don't know where you got that notion.

You are close-ish on #3, but why are you assuming what Bogle opines is gospel? Truth is: No One Knows with 100% Certainty.

And this: "out-of-the-money call options on Amazon.com" who the fuck here does that?

As for your last sentence: lots of people got foreclosed on in 2008-ish. Many of them are homeowners again. They're not paying "2-4x more." Finally, If ypu have a shitload of money in investments, you can make enough mortgage payments to avoid foreclosure, even if you lose your job. Hmmm, that's kind of the whole damn point, isn't it?

I'm not sure I get your point. You're pretty sure investing home equity in Amazon options would be the wrong decision because "who... does that?", but do you claim to know what would provide a reliable spread? The portfolio of long-duration corporate bonds perhaps? An all-equity index perhaps? Can we assume future rates of return (or bond defaults) based on past performance?

FWIW my point was that one must predict winners and losers with this approach, and leverage ups the ante. In a Japan scenario, the equity investment returns less than the loan costs. In a 1972 scenario, the bond portfolio dramatically underperforms. In a 1928 scenario, equities, bonds, and real estate all lose much of their value while the cost of one's debts increase due to deflation.

In 2008-ish, a lot of mortgaged retirees or unemployed people had to decide whether to liquidate their equity and bond investments at 40% off fire sale prices to cover mortgage expenses or to lose all their home equity to foreclosure and keep as many shares/bonds as possible while hoping for a rebound. That's not a good position to be in, and of course it could happen again. Don't build a trap for yourself!

It's easy to assume past investment returns predict future returns, but the decision process for leveraged investments is different because one must consider the reliability of returns. Amazon call options have yielded huge returns for a decade, but I wouldn't call them reliable either.

in 1928 or 2008 i'd rather have a mortgage on my house and cash in the bank than a partially paid off house - which is what the entire paydown club is doing. 

Also all of this discounts the amount of money made on the shares prior to sell off.  Another point often over looked by this arguement. its like your arguements always start with people dumping their 400k in equity in on the peak of a large drop.  and thats all the money they have to their name and they have to sell. 

boarder42

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Re: Equity shaming
« Reply #124 on: August 06, 2018, 11:05:05 AM »
so if not owning a lifted f350 stresses someone out we should dedicate threads to this in this community and pat each other on the back for each inch of lift we put on it? no punch them in the face and try to show them the error of their stress.

Some people are focused purely on maximum investment returns, at a risk level that others aren't OK with.

Others are focused more on overall quality of life and mental stress factors into that.

If you're in the first group, then leveraging the hell out of your house and going for investment returns makes some amount of sense.

I'm obviously in the second group, and to me, my wife, and evidently a lot of other people in this thread, not having debt is worth an awful lot of mental sanity and is worth something to them.  I personally consider the stress of carrying debt around as worth about 2% extra - so if I could only earn 2% on something involving shoveling a lot of debt around, I'd generally not do it.  That's my decision, along with my wife, and we prefer it that way.

I expect most people on this forum wouldn't enjoy living out in rural farm country on a hillside of rocks.  We happen to greatly enjoy it, as it's quite close to family, and works well for how we like to spend our time.

Some of the stuff we do will, certainly, delay a "FIRE date."  We're OK with that.  Because we don't feel a need to retire as early as absolutely possible, as I enjoy how I earn money, and it lines up quite closely to what I'd do in my spare time anyway - but I don't have to pay for nearly as much hardware this way.

I'm a pilot.  I fly.  We like flying places in small planes.  It's a great way to travel, if not the most financially efficient, but it's within somewhat handwaving distance of commercial for a family of 4, if a good bit slower, more scenic, and more likely to divert due to weather.

We spend a good bit less than comes in, and try to focus on spending money efficiently instead of just doing what other people do, though living in a lower cost of area where not everyone is competing to have the fanciest toys makes that an awful lot easier.

Not everyone on the board is focused on the absolute earliest retirement and their calculation spreadsheets for it.  That's fine.

... besides, a lifted F350 is usually a silly choice.  If you're doing serious offroading, you're way better off with something shorter (an old Jeep is a lot of fun, for instance).  An F350 is a good tow beast and heavy stuff hauler, and putting a sky high lift on that makes both loading the bed and hooking up trailers trickier.  I've got 19.5" wheels and light truck tires on mine, which wear great, but the bed height is a bit higher than I'd prefer for some purposes.

Also, not everyone has a mortgage or can get one.  And interest rates on a HELOC are usually enough higher that it's not worth it from those.

i'm perfectly ok with that decision BUT and its a huge BUT many of the stress factors and "risks" mortgage paydowners quote frequently as their reasoning are actually magnified by paying a mortgage down.  only when a home is 100% paid off do they realize part of the risk mitigation they believe they are getting rid of - so they are stressed about something and they're magnifiying it.  see the post above where the crap was incorrectly sighted again. 

also you don't have a mega thread dedicated to flying small aircraft b/c that doesnt belong in this forum. 
« Last Edit: August 06, 2018, 11:30:27 AM by boarder42 »

partgypsy

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Re: Equity shaming
« Reply #125 on: August 06, 2018, 11:29:56 AM »
so if not owning a lifted f350 stresses someone out we should dedicate threads to this in this community and pat each other on the back for each inch of lift we put on it? no punch them in the face and try to show them the error of their stress.

Some people are focused purely on maximum investment returns, at a risk level that others aren't OK with.

Others are focused more on overall quality of life and mental stress factors into that.

If you're in the first group, then leveraging the hell out of your house and going for investment returns makes some amount of sense.

I'm obviously in the second group, and to me, my wife, and evidently a lot of other people in this thread, not having debt is worth an awful lot of mental sanity and is worth something to them.  I personally consider the stress of carrying debt around as worth about 2% extra - so if I could only earn 2% on something involving shoveling a lot of debt around, I'd generally not do it.  That's my decision, along with my wife, and we prefer it that way.

I expect most people on this forum wouldn't enjoy living out in rural farm country on a hillside of rocks.  We happen to greatly enjoy it, as it's quite close to family, and works well for how we like to spend our time.

Some of the stuff we do will, certainly, delay a "FIRE date."  We're OK with that.  Because we don't feel a need to retire as early as absolutely possible, as I enjoy how I earn money, and it lines up quite closely to what I'd do in my spare time anyway - but I don't have to pay for nearly as much hardware this way.

I'm a pilot.  I fly.  We like flying places in small planes.  It's a great way to travel, if not the most financially efficient, but it's within somewhat handwaving distance of commercial for a family of 4, if a good bit slower, more scenic, and more likely to divert due to weather.

We spend a good bit less than comes in, and try to focus on spending money efficiently instead of just doing what other people do, though living in a lower cost of area where not everyone is competing to have the fanciest toys makes that an awful lot easier.

Not everyone on the board is focused on the absolute earliest retirement and their calculation spreadsheets for it.  That's fine.

... besides, a lifted F350 is usually a silly choice.  If you're doing serious offroading, you're way better off with something shorter (an old Jeep is a lot of fun, for instance).  An F350 is a good tow beast and heavy stuff hauler, and putting a sky high lift on that makes both loading the bed and hooking up trailers trickier.  I've got 19.5" wheels and light truck tires on mine, which wear great, but the bed height is a bit higher than I'd prefer for some purposes.

Also, not everyone has a mortgage or can get one.  And interest rates on a HELOC are usually enough higher that it's not worth it from those.

i'm perfectly ok with that decision BUT and its a huge BUT many of the stress factors and "risks" mortgage paydowners quote frequently as their reasoning are actually magnified by paying a mortgage down.  only when a home is 100% paid off do they realize part of the risk mitigation they believe they are getting rid of - so they are stressed about something and they're magnifiying it.  see the post above where the crap was incorrectly sighted again.
No, not really. Because of being dilligent with the mortgage I have enough equity in my house, if the worse comes to worse, I could sell my house and buy a less expensive house in cash. It is a sense of peace of mind I won't be homeless. If I tried to buy a house with my retirement fund, it would be incredibly expensive with paying taxes and early withdrawal fees.
Also, real estate is very local. Where I live real estate is outpacing the stock market. If anything I wish I invested more in real estate than the converse.

I know people who took money out of their primary home. Just what some people here are advising (use your home equity! Have no home equity!), then the recession happened and they either went through a period of unemployment or had to take a lower paying job. Not only did they lose their stock value, they couldn't keep up with both mortgage +heloc (or, their heloc was called and they had to pay it), so they had to sell their house in a down market. Let's just say not only was that avoidable, but financially - inefficient.
« Last Edit: August 06, 2018, 11:33:53 AM by partgypsy »

boarder42

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Re: Equity shaming
« Reply #126 on: August 06, 2018, 11:33:26 AM »
so if not owning a lifted f350 stresses someone out we should dedicate threads to this in this community and pat each other on the back for each inch of lift we put on it? no punch them in the face and try to show them the error of their stress.

Some people are focused purely on maximum investment returns, at a risk level that others aren't OK with.

Others are focused more on overall quality of life and mental stress factors into that.

If you're in the first group, then leveraging the hell out of your house and going for investment returns makes some amount of sense.

I'm obviously in the second group, and to me, my wife, and evidently a lot of other people in this thread, not having debt is worth an awful lot of mental sanity and is worth something to them.  I personally consider the stress of carrying debt around as worth about 2% extra - so if I could only earn 2% on something involving shoveling a lot of debt around, I'd generally not do it.  That's my decision, along with my wife, and we prefer it that way.

I expect most people on this forum wouldn't enjoy living out in rural farm country on a hillside of rocks.  We happen to greatly enjoy it, as it's quite close to family, and works well for how we like to spend our time.

Some of the stuff we do will, certainly, delay a "FIRE date."  We're OK with that.  Because we don't feel a need to retire as early as absolutely possible, as I enjoy how I earn money, and it lines up quite closely to what I'd do in my spare time anyway - but I don't have to pay for nearly as much hardware this way.

I'm a pilot.  I fly.  We like flying places in small planes.  It's a great way to travel, if not the most financially efficient, but it's within somewhat handwaving distance of commercial for a family of 4, if a good bit slower, more scenic, and more likely to divert due to weather.

We spend a good bit less than comes in, and try to focus on spending money efficiently instead of just doing what other people do, though living in a lower cost of area where not everyone is competing to have the fanciest toys makes that an awful lot easier.

Not everyone on the board is focused on the absolute earliest retirement and their calculation spreadsheets for it.  That's fine.

... besides, a lifted F350 is usually a silly choice.  If you're doing serious offroading, you're way better off with something shorter (an old Jeep is a lot of fun, for instance).  An F350 is a good tow beast and heavy stuff hauler, and putting a sky high lift on that makes both loading the bed and hooking up trailers trickier.  I've got 19.5" wheels and light truck tires on mine, which wear great, but the bed height is a bit higher than I'd prefer for some purposes.

Also, not everyone has a mortgage or can get one.  And interest rates on a HELOC are usually enough higher that it's not worth it from those.

i'm perfectly ok with that decision BUT and its a huge BUT many of the stress factors and "risks" mortgage paydowners quote frequently as their reasoning are actually magnified by paying a mortgage down.  only when a home is 100% paid off do they realize part of the risk mitigation they believe they are getting rid of - so they are stressed about something and they're magnifiying it.  see the post above where the crap was incorrectly sighted again.
No, not really. Because of being dilligent with the mortgage I have enough equity in my house, if the worse comes to worse, I could sell my house and buy a less expensive house in cash. It is a sense of peace of mind I won't be homeless. If I tried to buy a house with my retirement fund, it would be incredibly expensive with paying taxes and early withdrawal fees.

I know people who took money out of their primary home, then the recession happened and they either went through a period of unemployment or had to take a lower paying job. Not only did they lose their stock value, they couldn't keep up with both mortgage +heloc (or, their heloc was called and they had to pay it), so they had to sell their house in a down market. Let's just say not only was that avoidable if they had housing costs that were low enough 1 person could cover, but financially - inefficient.

no if worse comes to worse as in 2008 your equity would be gone you couldnt sell your house and pull anything out and that money you'd dumped in it is now worthless and if you lose your job your bank still wants to be paid or they'll foreclose on you so thank you again for showing yet another bad example of why you should pay a house donw. 

then following it up with anecdotal evidence of people who were bad with money. 

wait isnt that what you just said your plan was selling your house in a down market and taking out wait you wont ahve any equity.  so your pay down is actually not in line with your actual goals. 

partgypsy

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Re: Equity shaming
« Reply #127 on: August 06, 2018, 11:35:11 AM »
Yeah, but it's not true my case. I know you won't believe it but it's true. Ok, I'll explain. I bought a university-owned home. I can either a) sell my house in the local market (which is ridiculous right now), or b) sell it back to the university using a particular formula (which is a profit) or c) rent the house. Because of the desirable location and the higher number of renters wanting to live in this area over places to live, what I could rent this house for is significantly more than my current mortgage+ins+rent. Yes, even in a recession, because of the university.

As far as looking at good examples, and bad examples, I have seen far higher numbers of bad examples of what people do with their houses, than good examples. I have learned from their mistakes. I also invest in my retirement. They don't exclude one another.
In my case I'm perfectly comfortable doing what I'm doing.
« Last Edit: August 06, 2018, 11:40:02 AM by partgypsy »

boarder42

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Re: Equity shaming
« Reply #128 on: August 06, 2018, 11:37:48 AM »
Yeah, but it's not true my case. I know you won't believe it but it's true.

so you've found a place immune to housing crashes and has 0 supply and demand issues and will always be this way.  Gotta love that Utopia. 

partgypsy

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Re: Equity shaming
« Reply #129 on: August 06, 2018, 11:41:15 AM »
I wouldn't necessarily call it utopia, but yep, I love where I live.

boarder42

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Re: Equity shaming
« Reply #130 on: August 06, 2018, 11:45:15 AM »
Yeah, but it's not true my case. I know you won't believe it but it's true. Ok, I'll explain. I bought a university-owned home. I can either a) sell my house in the local market (which is ridiculous right now), or b) sell it back to the university using a particular formula (which is a profit) or c) rent the house. Because of the desirable location and the higher number of renters wanting to live in this area over places to live, what I could rent this house for is significantly more than my current mortgage+ins+rent. Yes, even in a recession, because of the university.

As far as looking at good examples, and bad examples, I have seen far higher numbers of bad examples of what people do with their houses, than good examples. I have learned from their mistakes. I also invest in my retirement. They don't exclude one another.
In my case I'm perfectly comfortable doing what I'm doing.

so until the university market crashes - which while not a common opinion i believe will occur sometime in my lifetime maybe before my kids get to college. 

and by you logic of bad examples you should just give us thinking you'll retire early b/c of all those other bad examples of people who live paycheck to paycheck that is such a shitty arguement.

FIreDrill

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Re: Equity shaming
« Reply #131 on: August 06, 2018, 11:51:31 AM »
so if not owning a lifted f350 stresses someone out we should dedicate threads to this in this community and pat each other on the back for each inch of lift we put on it? no punch them in the face and try to show them the error of their stress.

Some people are focused purely on maximum investment returns, at a risk level that others aren't OK with.

Others are focused more on overall quality of life and mental stress factors into that.

If you're in the first group, then leveraging the hell out of your house and going for investment returns makes some amount of sense.

I'm obviously in the second group, and to me, my wife, and evidently a lot of other people in this thread, not having debt is worth an awful lot of mental sanity and is worth something to them.  I personally consider the stress of carrying debt around as worth about 2% extra - so if I could only earn 2% on something involving shoveling a lot of debt around, I'd generally not do it.  That's my decision, along with my wife, and we prefer it that way.

I expect most people on this forum wouldn't enjoy living out in rural farm country on a hillside of rocks.  We happen to greatly enjoy it, as it's quite close to family, and works well for how we like to spend our time.

Some of the stuff we do will, certainly, delay a "FIRE date."  We're OK with that.  Because we don't feel a need to retire as early as absolutely possible, as I enjoy how I earn money, and it lines up quite closely to what I'd do in my spare time anyway - but I don't have to pay for nearly as much hardware this way.

I'm a pilot.  I fly.  We like flying places in small planes.  It's a great way to travel, if not the most financially efficient, but it's within somewhat handwaving distance of commercial for a family of 4, if a good bit slower, more scenic, and more likely to divert due to weather.

We spend a good bit less than comes in, and try to focus on spending money efficiently instead of just doing what other people do, though living in a lower cost of area where not everyone is competing to have the fanciest toys makes that an awful lot easier.

Not everyone on the board is focused on the absolute earliest retirement and their calculation spreadsheets for it.  That's fine.

... besides, a lifted F350 is usually a silly choice.  If you're doing serious offroading, you're way better off with something shorter (an old Jeep is a lot of fun, for instance).  An F350 is a good tow beast and heavy stuff hauler, and putting a sky high lift on that makes both loading the bed and hooking up trailers trickier.  I've got 19.5" wheels and light truck tires on mine, which wear great, but the bed height is a bit higher than I'd prefer for some purposes.

Also, not everyone has a mortgage or can get one.  And interest rates on a HELOC are usually enough higher that it's not worth it from those.

i'm perfectly ok with that decision BUT and its a huge BUT many of the stress factors and "risks" mortgage paydowners quote frequently as their reasoning are actually magnified by paying a mortgage down.  only when a home is 100% paid off do they realize part of the risk mitigation they believe they are getting rid of - so they are stressed about something and they're magnifiying it.  see the post above where the crap was incorrectly sighted again.
No, not really. Because of being dilligent with the mortgage I have enough equity in my house, if the worse comes to worse, I could sell my house and buy a less expensive house in cash. It is a sense of peace of mind I won't be homeless. If I tried to buy a house with my retirement fund, it would be incredibly expensive with paying taxes and early withdrawal fees.

I know people who took money out of their primary home. Just what some people here are advising (use your home equity! Have no home equity!), then the recession happened and they either went through a period of unemployment or had to take a lower paying job. Not only did they lose their stock value, they couldn't keep up with both mortgage +heloc (or, their heloc was called and they had to pay it), so they had to sell their house in a down market. Let's just say not only was that avoidable, but financially - inefficient.

Being dillegent with the mortgage did not afford you the option to sell and buy a house with cash.  Saving that money did. The equity is just an account that holds that money just as an investment account would.  Only an investment account is much easier to access and withdraw funds, especially during rough economic times. 

I don't think anyone here is advocating taking out a callable heloc and buying stocks with it.  The whole purpose of this comparison assumes long term 30 year mortgages. I would much rather have 400k in investments and a 400k mortgage than a paid off house. 400k is enough to get me through another 2008/2009  while paying the mortgage and this assumes 50% lose in stock/home value. Plus, even if you paid off your house, you still need to afford taxes at a minimum and probably insurance as well. While investments may be more volitile at least they give you the flexibility to weather out a storm and the long term returns are a huge bonus.

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« Last Edit: August 06, 2018, 12:22:09 PM by FIreDrill »

partgypsy

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Re: Equity shaming
« Reply #132 on: August 06, 2018, 11:53:52 AM »
Dude, your jealousy is showing. I know my situation is unusual and can't be replicable, but I operate on what my situation is, not generic advice. If the market here gets messed up to the degree you are suggesting, the stocks you have invested in won't be worth much of anything at all either. You only realize investments when they are sold. Explain to me how you ride out the volitality, if you are saying your selling stocks to weather the storm? If you had a paid off house in 2008 2009 yes your house is worth less, but your monthly carrying costs are less and so it will be easier to weather the storm. 

I actually agree with the advice, to save as much money as possible in investments. A house is not a pure investment because you also live in it. That's why I'm actually advocating less money towards housing, more towards investments, which could also include real estate.

To give you an example, someone in my neighborhood bought and tore down a slum house sold for $150K. Spent another 225K building a big new house on the lot. I hear they are selling it for 750K. That's a pretty good ROI.

« Last Edit: August 06, 2018, 12:12:09 PM by partgypsy »

mathlete

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Re: Equity shaming
« Reply #133 on: August 06, 2018, 12:11:45 PM »
this is where you're incredibly wrong - its not a few percentage points of margin.  its 7-8% for me personally with a 3.25% fixed rate mortgage for 30 years.  and even at today's current rates its 5-6% thats not just a small amount. 

berkshire is a 50 year history with a leader who is close to dieing.  while they are diversified they arent as diversified as VTSAX likely not even close or they wouldnt be beating it by 2x over 50 years. 

The hang up on this fucking subject is its incredibly detrimental.  more detrimental than almost all the other crap people are pinching pennies for while they are stepping over the 100 dollar bills of just not paying a mortgage down and investing.  which takes no extra life energy. 

And in the context of this specific post when data is presented that shows it actually elminates SORR if done continuously you all still go nuh uh i dont care i hate debt ... then bring up retarded what if scenarios like the above amazon post and quoting what happend in japan - guess what if japan happens to the US TSM index 95% of this forum mortgage or not is fucked so who cares.

if you walk into a room and tell everyone they can have 100-500k more dollars everyone asks how.  then when you tell them you dont have to really do anything except click three buttons and stop sending cash to a mortgage and send it to VTSAX. you go thats not worth it -- half a million nah can't be worth it.  but hang drying these clothes is worth a nickle a week i tell you what!

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Re: Equity shaming
« Reply #134 on: August 06, 2018, 12:19:34 PM »
i'm perfectly ok with that decision BUT and its a huge BUT many of the stress factors and "risks" mortgage paydowners quote frequently as their reasoning are actually magnified by paying a mortgage down. only when a home is 100% paid off do they realize part of the risk mitigation they believe they are getting rid of - so they are stressed about something and they're magnifiying it.

Recasting the mortgage is one way mitigate risk in this case.

FIreDrill

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Re: Equity shaming
« Reply #135 on: August 06, 2018, 12:53:34 PM »


Dude, your jealousy is showing. I know my situation is unusual and can't be replicable, but I operate on what my situation is, not generic advice. If the market here gets messed up to the degree you are suggesting, the stocks you have invested in won't be worth much of anything at all either. You only realize investments when they are sold. Explain to me how you ride out the volitality, if you are saying your selling stocks to weather the storm? If you had a paid off house in 2008 2009 yes your house is worth less, but your monthly carrying costs are less and so it will be easier to weather the storm. 

I actually agree with the advice, to save as much money as possible in investments. A house is not a pure investment because you also live in it. That's why I'm actually advocating less money towards housing, more towards investments, which could also include real estate.

To give you an example, someone in my neighborhood bought and tore down a slum house sold for $150K. Spent another 225K building a big new house on the lot. I hear they are selling it for 750K. That's a pretty good ROI.

Not sure if you were replying to me or border but I'm guessing me from the reference of 2008 and 2009.

Trust me, no jealousy coming from me.  I was simply pointing out the flawed thought process that deligently pre paying your mortgage afforded you more options than investing that money.

To address your question about riding out a storm.  If the option is between 400k paid off house with no reserves and 400k investments while having a mortgage I'd take the investments any day.  If you lose your job you have the ability to DCA sell through the dip and while it's the worse time to do so at least you are able to keep afloat until you pick up work.  If you own the home with no reserves you are screwed. No bank will lend to you against the house if you are unemployed.  You are then at risk of losing the house due to unpaid taxes.

The absolute worse case is you are still in the payoff stage and the above scenario happens. Then not only do you have no reserves but you also have the increased monlthy expenses which will result in you going under even quicker and being foreclosed on.

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boarder42

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Re: Equity shaming
« Reply #136 on: August 06, 2018, 01:00:37 PM »


Dude, your jealousy is showing. I know my situation is unusual and can't be replicable, but I operate on what my situation is, not generic advice. If the market here gets messed up to the degree you are suggesting, the stocks you have invested in won't be worth much of anything at all either. You only realize investments when they are sold. Explain to me how you ride out the volitality, if you are saying your selling stocks to weather the storm? If you had a paid off house in 2008 2009 yes your house is worth less, but your monthly carrying costs are less and so it will be easier to weather the storm. 

I actually agree with the advice, to save as much money as possible in investments. A house is not a pure investment because you also live in it. That's why I'm actually advocating less money towards housing, more towards investments, which could also include real estate.

To give you an example, someone in my neighborhood bought and tore down a slum house sold for $150K. Spent another 225K building a big new house on the lot. I hear they are selling it for 750K. That's a pretty good ROI.

Not sure if you were replying to me or border but I'm guessing me from the reference of 2008 and 2009.

Trust me, no jealousy coming from me.  I was simply pointing out the flawed thought process that deligently pre paying your mortgage afforded you more options than investing that money.

To address your question about riding out a storm.  If the option is between 400k paid off house with no reserves and 400k investments while having a mortgage I'd take the investments any day.  If you lose your job you have the ability to DCA sell through the dip and while it's the worse time to do so at least you are able to keep afloat until you pick up work.  If you own the home with no reserves you are screwed. No bank will lend to you against the house if you are unemployed.  You are then at risk of losing the house due to unpaid taxes.

The absolute worse case is you are still in the payoff stage and the above scenario happens. Then not only do you have no reserves but you also have the increased monlthy expenses which will result in you going under even quicker and being foreclosed on.

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i'm in no case jealous of your situation.  Just pointing out that your Utopia can fold to think that it cannot is a poor way to look at it.

boarder42

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Re: Equity shaming
« Reply #137 on: August 06, 2018, 01:02:27 PM »
i'm perfectly ok with that decision BUT and its a huge BUT many of the stress factors and "risks" mortgage paydowners quote frequently as their reasoning are actually magnified by paying a mortgage down. only when a home is 100% paid off do they realize part of the risk mitigation they believe they are getting rid of - so they are stressed about something and they're magnifiying it.

Recasting the mortgage is one way mitigate risk in this case.

which is super simple to do in the world where you lose your job and then need money wait no its not.

Bird In Hand

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Re: Equity shaming
« Reply #138 on: August 06, 2018, 01:03:03 PM »
If the option is between 400k paid off house with no reserves and 400k investments while having a mortgage I'd take the investments any day.

Sorry if I missed it upstream, but are those actually the options being discussed?  Is there room in this discussion for normal mustachian-type people who have large pre-tax nesteggs to fall back on in a true emergency?  Granted, the 10% penalty with hardship withdrawals from a 401(k) would be hard to swallow, but I'm wondering whether "400k paid off house with no reserves" is a bit of a straw man in this case.

FIreDrill

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Re: Equity shaming
« Reply #139 on: August 06, 2018, 01:20:11 PM »
Those were just numbers I pulled out for an example and I wanted to keep them equal.  A better example would probably be 400k house paid off with 100k in investments or just 500k In investments and a 400k mortgage.  In my mind this really just boils down to asset allocation and if you look at your mortgage pay down as a bond then people may be choosing a 20/80 stock to bond asset allocation. I don't think anyone here would recommend that as a good allocation for people in their 20s or 30s which is where my mind usually goes because I'm in the 20s group.  Now if mortgage rates are 7-8% then that changes things.

It's kinda funny because we argue about this all the time on the forum but I have a feeling if shit were to hit the fan we would all be a little more supportive with one anothers situations. At least I hope we would be.

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Bird In Hand

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Re: Equity shaming
« Reply #140 on: August 06, 2018, 01:20:56 PM »
i'm perfectly ok with that decision BUT and its a huge BUT many of the stress factors and "risks" mortgage paydowners quote frequently as their reasoning are actually magnified by paying a mortgage down. only when a home is 100% paid off do they realize part of the risk mitigation they believe they are getting rid of - so they are stressed about something and they're magnifiying it.

Recasting the mortgage is one way mitigate risk in this case.

which is super simple to do in the world where you lose your job and then need money wait no its not.

Yes, it is super simple to do.  If you cannot afford the $100-$250 fee most lenders charge (some will do it free) because you lost your job or whatever, then sure, it becomes harder.  I think most mustachians have at least a modest emergency fund that could afford this if necessary.

I'm sorry if I didn't make it clear above, but what I actually had in mind was proactively recasting by a mustachian individual (perhaps not in your opinion) who has been making extra principal payments over a period of time.  We've been thinking about recasting our loan just to bring the P&I down from ~$1,700 to ~$500.  This would give us $1,200/mo breathing room if we needed it for some reason.

partgypsy

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Re: Equity shaming
« Reply #141 on: August 06, 2018, 01:40:58 PM »
Boarder, "Just pointing out that your Utopia can fold to think that it cannot is a poor way to look at it."
I never said it couldn't. And I didn't call it a utopia or it can never fold, you did. And if/when it did fold everyone would be in the same shitty situation, so I guess you would be happy then? 

Let me correct a couple misassumptions. I am not pre-paying my mortgage. I re-mortgaged at a lower rate (3.75%), for a shorter period of time (15, will be paid off in 8 years). The vast majority of the equity is not from pre-paying, but from a) sweat equity from fixing up the house myself or with cheap help, and b) buying in a location where I bought low, which happened to appreciate in value. I don't have insider stock knowledge, but I did have help/get lucky in this case. Third, I am investing in the stock market for my retirement. I intend on living off soc security and retirement funds. I have very little in cash savings, but as least while I have a job, I can get a loan from my retirement fund very cheaply and a heloc on my house is open but has 0 balance. Because I bought the house relatively cheaply I can invest more than the average person.  Maybe for some their transaction costs are low for stocks but it is not the case for me. As my stocks are in my retirement fund and pre tax, I would need to pay both income tax and penalties on withdrawals. Stocks are only cheap to transact when I am of retirement age.
People have to be aware of their risk comfort. I have my assets allocated so when we did go through 2 down cycles (late 90's, 2008) I was comfortable not to withdraw or shift money, and it came back and then some. If I had my house equity invested in stocks that were going down and down, I think most people would feel their house is on the line and either cash out or re-allocate and not realize future gains. Or more likely, as we saw in the last recession, most people who take out equity from their house, don't invest in stocks or at the very least become more loose with their spending. We like to think we are perfect people who act like computers doing to optimal thing, but these models don't include real human behavior, especially when the crap is hitting the fan.

I do agree that my highest risk is between now and then (next 8 years), especially as I am a single income household. 
« Last Edit: August 06, 2018, 01:59:51 PM by partgypsy »

mathlete

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Re: Equity shaming
« Reply #142 on: August 06, 2018, 02:08:40 PM »
I would much rather have 400k in investments and a 400k mortgage than a paid off house.

Me too. If for liquidity if nothing else. $400K in stocks can become a home a lot faster than a home can become stocks.

But for a lot of people, myself included, the choice is really whether we'd rather pay down debt, or leverage more debt using our home as collateral in order to buy more stocks. If you're putting $60K+ a year into US equities already, though, maybe your appetite is to closer to being met.

A paid-off home is essentially a bond. If you would otherwise rent, it pays the inflation adjusted market rent (less taxes, insurance, maintenance) on your home in perpetuity. If you would otherwise finance the home, it's a bond with coupons equal to your hypothetical P&I with a duration equal to that of your hypothetical mortgage term. So the argument against a paid off home is an argument against bonds. Which is a perfectly fine argument to make. But I guess I'd rather hear that argument made in the abstract.

FIreDrill

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Re: Equity shaming
« Reply #143 on: August 06, 2018, 03:02:58 PM »


I would much rather have 400k in investments and a 400k mortgage than a paid off house.

A paid-off home is essentially a bond. If you would otherwise rent, it pays the inflation adjusted market rent (less taxes, insurance, maintenance) on your home in perpetuity. If you would otherwise finance the home, it's a bond with coupons equal to your hypothetical P&I with a duration equal to that of your hypothetical mortgage term. So the argument against a paid off home is an argument against bonds. Which is a perfectly fine argument to make. But I guess I'd rather hear that argument made in the abstract.

Yep, I referenced this up thread.  I don't think many of us would advocate at 50/50 bond stock asset allocation for people in there 20s or 30s but in many cases that is what people do when they talk about accelerated mortgage pay off.  Sometimes it is even further towards bonds than stocks.


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mathlete

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Re: Equity shaming
« Reply #144 on: August 06, 2018, 03:13:46 PM »


I would much rather have 400k in investments and a 400k mortgage than a paid off house.

A paid-off home is essentially a bond. If you would otherwise rent, it pays the inflation adjusted market rent (less taxes, insurance, maintenance) on your home in perpetuity. If you would otherwise finance the home, it's a bond with coupons equal to your hypothetical P&I with a duration equal to that of your hypothetical mortgage term. So the argument against a paid off home is an argument against bonds. Which is a perfectly fine argument to make. But I guess I'd rather hear that argument made in the abstract.

Yep, I referenced this up thread.  I don't think many of us would advocate at 50/50 bond stock asset allocation for people in there 20s or 30s but in many cases that is what people do when they talk about accelerated mortgage pay off.  Sometimes it is even further towards bonds than stocks.


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Sorry. I must have missed your earlier comments. Accelerated payoff is another can of worms of course. It certainly falls on the side of "mortgage = bad", but I view it much further along in that spectrum than simply not using your home as collateral for leveraged investments.


kite

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Re: Equity shaming
« Reply #145 on: August 06, 2018, 04:02:14 PM »
Well, he's got Kiyosaki's endorsement.  So, there's that. 

There is always some version of the home equity versus active investment debate going on.  Typically, the "active investment" alternative to paying down the mortgage or buying at all is index funds.  The twist for this author is that it's more real estate. Yet, it's the same as every rent versus buy discussion.
 It's not that A is always a wiser move than B.  It's that overpaying for something is a ticket to misery....whether that thing is real estate, college tuition, engagement rings, hair cuts or stocks.  The other point that gets missed in the blind love of equity index funds is the question of why anyone (like a bank) would lend money on real estate for a measly sub 5% interest rate if there was something better that was so easy and practically foolproof.  None of the risk of default or hassle of actually dealing with customers and staff if they just forked it all over to Vanguard or their own prop trading desk to manage!  And yet.........here we are.

Sure, run your simulators.  Tap the equity to buy some other money generator.  It can't possibly fail.



mathlete

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Re: Equity shaming
« Reply #146 on: August 06, 2018, 04:09:30 PM »
Well, he's got Kiyosaki's endorsement.  So, there's that. 

There is always some version of the home equity versus active investment debate going on.  Typically, the "active investment" alternative to paying down the mortgage or buying at all is index funds.  The twist for this author is that it's more real estate. Yet, it's the same as every rent versus buy discussion.
 It's not that A is always a wiser move than B.  It's that overpaying for something is a ticket to misery....whether that thing is real estate, college tuition, engagement rings, hair cuts or stocks. The other point that gets missed in the blind love of equity index funds is the question of why anyone (like a bank) would lend money on real estate for a measly sub 5% interest rate if there was something better that was so easy and practically foolproof.  None of the risk of default or hassle of actually dealing with customers and staff if they just forked it all over to Vanguard or their own prop trading desk to manage!  And yet.........here we are.

Sure, run your simulators.  Tap the equity to buy some other money generator.  It can't possibly fail.

I have been thinking, quite literally for days, on whether (and how) to sneak that little point in here.

TomTX

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Re: Equity shaming
« Reply #147 on: August 06, 2018, 04:24:39 PM »
The other point that gets missed in the blind love of equity index funds is the question of why anyone (like a bank) would lend money on real estate for a measly sub 5% interest rate if there was something better that was so easy and practically foolproof.  None of the risk of default or hassle of actually dealing with customers and staff if they just forked it all over to Vanguard or their own prop trading desk to manage!  And yet.........here we are.

Because Federal banking regulations prevent them from just dumping everything into stocks.

TempusFugit

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Re: Equity shaming
« Reply #148 on: August 06, 2018, 04:46:55 PM »

Black Jack with a bit of know how has the lowest house edge btw - 0.4% with good rules before any counting.


I believe that the odds bets in craps (backing up your initial pass bet once the point is known) are the best odds in the casino.  Which, of course, means that the house will still win most of the time, just not quite as often. 

Telecaster

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Re: Equity shaming
« Reply #149 on: August 06, 2018, 04:52:39 PM »
One dimension that's missing is: how much to spend on your house in the first place? Should you buy more house than you need simply because of the benefits that leveraging extra capital for investing can buy you?

The opposite.  Housing is not an investment.  Housing is an expense, and like all expenses you should try to optimize and minimize.