Author Topic: Equity shaming  (Read 9550 times)

Malkynn

  • Handlebar Stache
  • *****
  • Posts: 1001
Re: Equity shaming
« Reply #150 on: August 06, 2018, 05:09:15 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!

chill

Ainít never gonna happen.

Hargrove

  • Pencil Stache
  • ****
  • Posts: 690
Re: Equity shaming
« Reply #151 on: August 06, 2018, 06:14:27 PM »
Why wouldn't... banks... try to make more money than 5%?

Why... wouldn't... banks... do something... say, a little more risky... a little more clever, you know, live a little... why wouldn't they come up with some sort of... complex... financial instrument, maybe...

Why wouldn't...

Banks...

(Seriously though, these conversations routinely start "Here's a mathematically superior bet," then receive "No! You could lose the bet!" Fine, but is there a mathematically superior one? The premise wasn't that we can't lose. No one can argue there won't be an exception - to get to best practices, we have to weed through better and worse practices)
« Last Edit: August 06, 2018, 06:19:19 PM by Hargrove »

kite

  • Pencil Stache
  • ****
  • Posts: 569
Re: Equity shaming
« Reply #152 on: August 06, 2018, 06:24:03 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.

Because it's not foolproof.  Because it's an incredible risk. 

TomTX

  • Magnum Stache
  • ******
  • Posts: 2910
  • Location: Texas
Re: Equity shaming
« Reply #153 on: August 06, 2018, 06:40:09 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.

Because it's not foolproof.  Because it's an incredible risk.

If you want foolproof, put everything in CDs and wait for your social security.

Guaranteed to prevent FIRE.

On this site, it's the proof you are a fool.

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 1214
  • Location: Seattle, WA
Re: Equity shaming
« Reply #154 on: August 06, 2018, 07:02:04 PM »
I have been thinking, quite literally for days, on whether (and how) to sneak that little point in here.

The short answer is that, as TomTX points out, it is illegal.  So there's that. 

The still short, but somewhat longer, answer is that banks are in business to make money.   By not paying off the mortgage we're hoping to improve our position by an average of 4%-ish a year.  We get that by doing nothing, so it is pretty great.  But banks typically get a return on equity of like 10-12%.   

The longer answer is that's not what banks do.  If you think about, you could apply your same logic to every single business loan every made.  Instead of loaning a developer money to put in that new housing development, why wouldn't the bank simply develop the land themselves and make the money the developer is hoping to make?  The bank could loan Jobs and Wozniak money to start a computer company.  Or the bank could simply start a computer company themselves.  Riches follow.  Why don't banks do that?  Because that's not what they do.  Banks understand loaning money, so that's what they do. 


RWD

  • Handlebar Stache
  • *****
  • Posts: 2160
  • Location: Mississippi
Re: Equity shaming
« Reply #155 on: August 06, 2018, 07:07:06 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.

Because it's not foolproof.  Because it's an incredible risk.

Even if it were allowed it's more complicated than a bank choosing between investing in stocks and loaning mortgages because they can loan more than they have on hand.
https://en.wikipedia.org/wiki/Fractional-reserve_banking

It's as if you had 100k to invest and you could either turn that into $100k in the stock market at an expected 10% return or $1 million in mortgages at 4%.

johndoe

  • 5 O'Clock Shadow
  • *
  • Posts: 65
Re: Equity shaming
« Reply #156 on: August 06, 2018, 07:27:03 PM »
...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.

Not that I'm an example worth following, but that's what I did.  My thinking was that lowering my monthly costs would give an opportunity to invest the difference and achieve dollar cost averaging.  If an emergency comes up I can slow the investment rate and won't be challenged to make payments. 

I'm sure mathematically this isn't optimal.  Perhaps I'll be tempted to pull the equity out the next time the market tanks.  I'll just have to make sure it's the bottom before I invest a big lump sum=)

boarder42

  • Walrus Stache
  • *******
  • Posts: 7478
Re: Equity shaming
« Reply #157 on: August 06, 2018, 07:33:04 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.

Bingo. You guys act like we haven't heard this shit before like you've come up with some great idea.

But even if it were legal the question is if you don't believe equities can out return your low fixed mortgage how do you expect to fire with equities.  Basically the statement you're making when you say this is but it may not happen. Well then we're all fucked so who cares

Also the govt subsidizes the debt the bank isn't technically lending all that money it's backed by freddie and Fannie and the get paid to maintain them.
« Last Edit: August 06, 2018, 07:38:24 PM by boarder42 »

boarder42

  • Walrus Stache
  • *******
  • Posts: 7478
Re: Equity shaming
« Reply #158 on: August 06, 2018, 07:41:55 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.

Because it's not foolproof.  Because it's an incredible risk.

Hahahahhahababhabahahah I can't stop laughing at this statement.

FiftyIsTheNewTwenty

  • Stubble
  • **
  • Posts: 210
Re: Equity shaming
« Reply #159 on: August 06, 2018, 08:28:18 PM »
Forbes is supported by bank advertising, so of course they want you to keep buying loans!

Besides interest, don't forget the other costs of getting a loan, like paying points and other fees, appraisals, etc.

boarder42

  • Walrus Stache
  • *******
  • Posts: 7478
Re: Equity shaming
« Reply #160 on: August 06, 2018, 08:30:57 PM »
Forbes is supported by bank advertising, so of course they want you to keep buying loans!

Besides interest, don't forget the other costs of getting a loan, like paying points and other fees, appraisals, etc.

Wow I never thought of those costs I'll change my whole stance now.

the_fixer

  • Bristles
  • ***
  • Posts: 367
  • Location: Colorado
  • mind on my money money on my mind
Re: Equity shaming
« Reply #161 on: August 06, 2018, 10:21:15 PM »
So what interest rate is the breaking point?

Sent from my Pixel 2 XL using Tapatalk


boarder42

  • Walrus Stache
  • *******
  • Posts: 7478
Re: Equity shaming
« Reply #162 on: August 07, 2018, 04:51:09 AM »
So what interest rate is the breaking point?

Sent from my Pixel 2 XL using Tapatalk

Depends on where you're at in the investment order. And if you still get a tax deduction which is unlikely.  However with the cfiresim I ran even doing 7% cash out refinances improved success rate when done every 10 years with assumed house value appreciation of 3% annually.

Dicey

  • Walrus Stache
  • *******
  • Posts: 8030
  • Age: 60
  • Location: NorCal
Re: Equity shaming
« Reply #163 on: August 07, 2018, 06:59:49 AM »
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.
Back in the pre-internet days when I was playing, this was the case. The details are fuzzy now, but I remember only playing at casinos where Double Odds were offered. So - Play the Don't Pass Line + Double Odds= Best Odds. Feel free to correct me if it's changed. These days, I have as much desire to gamble as I do to buy a lottery ticket, which is to say, zero.

FIRE47

  • Bristles
  • ***
  • Posts: 294
Re: Equity shaming
« Reply #164 on: August 07, 2018, 07:04:12 AM »
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.
Back in the pre-internet days when I was playing, this was the case. The details are fuzzy now, but I remember only playing at casinos where Double Odds were offered. So - Play the Don't Pass Line + Double Odds= Best Odds. Feel free to correct me if it's changed. These days, I have as much desire to gamble as I do to buy a lottery ticket, which is to say, zero.

Haha not to derail the thread but this is correct - was only considering the initial bet.

onlykelsey

  • Handlebar Stache
  • *****
  • Posts: 1886
Re: Equity shaming
« Reply #165 on: August 07, 2018, 07:12:20 AM »
Forbes is supported by bank advertising, so of course they want you to keep buying loans!

Besides interest, don't forget the other costs of getting a loan, like paying points and other fees, appraisals, etc.

Wow I never thought of those costs I'll change my whole stance now.

Honestly, they're pretty substantial in some markets.  I have a 30 year fixed and it looked like it would take me about nine years to recoup the refi costs when I last looked in to it.  No thanks.  I thought I'd maybe look again, but it looks like I will not be refinancing for some time as rates are rising.

boarder42

  • Walrus Stache
  • *******
  • Posts: 7478
Re: Equity shaming
« Reply #166 on: August 07, 2018, 07:24:11 AM »
Forbes is supported by bank advertising, so of course they want you to keep buying loans!

Besides interest, don't forget the other costs of getting a loan, like paying points and other fees, appraisals, etc.

Wow I never thought of those costs I'll change my whole stance now.

Honestly, they're pretty substantial in some markets.  I have a 30 year fixed and it looked like it would take me about nine years to recoup the refi costs when I last looked in to it.  No thanks.  I thought I'd maybe look again, but it looks like I will not be refinancing for some time as rates are rising.

1. you dont have to REFI you can get HEL's that are fixed to pull out equity - i see 5.84% right now on PenFed for a 20 year fixed rate
2. It's just a math equation to determine when costs will be recouped.  In my market you can sacrafice an 8th of a point to get a no cost REFI and another 8th to pull cash out. so for a quarter point higher rate than the prime rate i can typically do a cash our REFI at no cost - i dont even pay for the inspection.  And no they arent rolling the costs into the loan amount - its in the interest rate amount.

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 1037
Re: Equity shaming
« Reply #167 on: August 07, 2018, 07:42:25 AM »
I remember in 2009-2010 it was all the rage on the internet to look down upon (shame?) the people who leveraged real estate to the max and then were foreclosed upon when stocks and real estate simultaneously tanked at the same time unemployment went up. There was this morality tale everyone repeated because they heard it from somebody else: people got greedy and took on too much leverage/risk because they were fools, and the recession was their fault. People were bullying commenters on articles and blogs, calling them stupid for buying half million dollar houses in Vegas or LA or immoral for leaving the banks to clean up the mess. It seemed so obvious at the time.

After almost a decade of skyrocketing stock returns and easy lending, the internet has flipped around. Nowadays, you are a fool for not extracting home equity to invest in tech stocks with six figure PE ratios (which comprise much of the indexes).

Perhaps there is a generational gap between people who experienced 2008 as stock/equity owners and those who were focused on soccer or prom at that time. Interestingly though, the behavior is the same - shame on those who aren't on the bandwagon.

This observation is valuable to me: People on the internet will judge your investment decisions primarily based upon the experience of the past 3-4 years. One year ago, there were discussions on this forum where people were calling others stupid for not putting at least 10-20% of their savings into bitcoin. Now people dig up those old forums to mock those people who lost their money while calling others stupid. It never stops.

mak1277

  • Pencil Stache
  • ****
  • Posts: 722
Re: Equity shaming
« Reply #168 on: August 07, 2018, 07:44:25 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.

It's not relevant.  I have golden handcuffs that are keeping me working for 2 more years.  My mortgage payoff didn't change my retirement date by a single day. 

I'm happy to take a lower return in exchange for completely eliminating a cash outflow. 

OurTown

  • Pencil Stache
  • ****
  • Posts: 853
  • Age: 48
  • Location: Tennessee
Re: Equity shaming
« Reply #169 on: August 07, 2018, 08:12:12 AM »
Isn't this more of an investment order question?  The way I look at it, I have a magic FIRE number that covers our monthly burn sans mortgage payment.  Let's say, for purposes of argument, it is $1m invested.  Let's further assume that I am locked in at a modest interest rate, in my case 3 3/8 %, for about another decade, and further assume my LTV sits at about 50%.  In this situation, while I am accumulating, it makes absolutely no sense to prepay the mortgage instead of investing toward my FIRE number.  I just pay the mortgage payments as they come and shovel as much cash as possible into index funds.

Now, once I hit the FIRE number, the calculus is different.  The goals I set for my money will also be different.  I want to live off the stache.  By my estimates, I will have 5 years left on the mortgage at that point, LTV will be in the vicinity of 25%.  More than likely I will work just long enough to stuff some money into a brokerage account until that balance exceeds the payoff, then I will kill the mortgage and FIRE.  Now, I could continue to dick around and arbitrage the remaining balance against what I am making on the brokerage account until the mortgage pays out on its own, but why complicate matters?  Sometimes, the juice is not worth the squeeze. 

GuitarStv

  • Senior Mustachian
  • ********
  • Posts: 11307
  • Age: 37
  • Location: Toronto, Ontario, Canada
Re: Equity shaming
« Reply #170 on: August 07, 2018, 08:15:04 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?

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

See, this is half true.

While you're living in a place, housing is an expense.  When you sell a place, housing is an investment.

I'm planning on selling my current house when I retire.  So far, my home has appreciated more than any market investment I've made.  If I was living in my forever home, I would view it quite differently (and yes, optimize/minimize would be my primary goals).

OurTown

  • Pencil Stache
  • ****
  • Posts: 853
  • Age: 48
  • Location: Tennessee
Re: Equity shaming
« Reply #171 on: August 07, 2018, 08:34:18 AM »
Two other thoughts.  If the house is paid off, you avoid the cost of rental or P&I payments, so it's a quasi-dividend.  In my case, the value of that quasi dividend will be about 6% per year. 

Also, if you so choose, your paid-off house can pass to your heirs, so you can feel free to spend down your entire stache during your lifetime.

mak1277

  • Pencil Stache
  • ****
  • Posts: 722
Re: Equity shaming
« Reply #172 on: August 07, 2018, 08:53:27 AM »
The other way I look at this is: Would I use leverage to invest?  And the answer is a resounding no.

OurTown

  • Pencil Stache
  • ****
  • Posts: 853
  • Age: 48
  • Location: Tennessee
Re: Equity shaming
« Reply #173 on: August 07, 2018, 09:00:48 AM »
Not unless it is leverage you would have had anyway.  Most people have to take out a mortgage to purchase their home, they are going to have that debt whether they invest or not.  So if the question is, do you prepay a low interest mortgage or do you invest in an S&P 500 index fund, the answer is go for the easy arbitrage and invest.  If the question is do you take out new debt on your home for the purpose of investing, I think that is a different mindset.  I would not, others would, YMMV. 

onlykelsey

  • Handlebar Stache
  • *****
  • Posts: 1886
Re: Equity shaming
« Reply #174 on: August 07, 2018, 09:03:52 AM »
The other way I look at this is: Would I use leverage to invest?  And the answer is a resounding no.

It's weird how inconsistent my brain can be.  Especially five years ago when I was starting my career, I would not have taken out a ~24K HELOC in order to invest.  I took one out as 25% of my 20% down payment on my condo, though, and then plugged money in to taxable investments rather than paying down my HELOC, which was effectively the same thing.

mak1277

  • Pencil Stache
  • ****
  • Posts: 722
Re: Equity shaming
« Reply #175 on: August 07, 2018, 09:13:18 AM »
The other way I look at this is: Would I use leverage to invest?  And the answer is a resounding no.

It's weird how inconsistent my brain can be.  Especially five years ago when I was starting my career, I would not have taken out a ~24K HELOC in order to invest.  I took one out as 25% of my 20% down payment on my condo, though, and then plugged money in to taxable investments rather than paying down my HELOC, which was effectively the same thing.

I also think that part of the "problem" is that I don't view my house as an investment.  So that makes it seem less risky to me.  If real estate values crash, it doesn't really matter to me if I have a paid off house.  I just continue to live there like I normally would...I haven't lost anything.  If the market crashes I've clearly lost something.

RWD

  • Handlebar Stache
  • *****
  • Posts: 2160
  • Location: Mississippi
Re: Equity shaming
« Reply #176 on: August 07, 2018, 09:13:54 AM »
The other way I look at this is: Would I use leverage to invest?  And the answer is a resounding no.

People use leverage all the time to invest in real estate by not buying property with cash. Do you think @arebelspy would have retired at 30 if they waited until they could buy investment property without a loan?

Using leverage to invest in stocks is typically frowned upon because there are a lot of strings attached. Margin loans are callable, which greatly increases the risk. But if you use leverage to buy your personal residence and then invest the difference in stocks you don't have to worry about the loan being pulled out from under you. If there were 30-year unsecured non-callable loans available for a reasonable interest rate it would definitely make financial sense. These just simply don't exist.

RWD

  • Handlebar Stache
  • *****
  • Posts: 2160
  • Location: Mississippi
Re: Equity shaming
« Reply #177 on: August 07, 2018, 09:15:08 AM »
If the market crashes I've clearly lost something.

What exactly is your plan for funding FIRE?

mak1277

  • Pencil Stache
  • ****
  • Posts: 722
Re: Equity shaming
« Reply #178 on: August 07, 2018, 09:17:49 AM »
If the market crashes I've clearly lost something.

What exactly is your plan for funding FIRE?

3% WR, 50% equity, 50% bonds/cash

RWD

  • Handlebar Stache
  • *****
  • Posts: 2160
  • Location: Mississippi
Re: Equity shaming
« Reply #179 on: August 07, 2018, 09:24:48 AM »
If the market crashes I've clearly lost something.

What exactly is your plan for funding FIRE?

3% WR, 50% equity, 50% bonds/cash

So if I offered you a loan at 2.9% for 30 years, non-callable no strings attached, would you take it and invest in 50/50 equities/bonds or would you decline?

boarder42

  • Walrus Stache
  • *******
  • Posts: 7478
Re: Equity shaming
« Reply #180 on: August 07, 2018, 09:51:42 AM »
The other way I look at this is: Would I use leverage to invest?  And the answer is a resounding no.

People use leverage all the time to invest in real estate by not buying property with cash. Do you think @arebelspy would have retired at 30 if they waited until they could buy investment property without a loan?

Using leverage to invest in stocks is typically frowned upon because there are a lot of strings attached. Margin loans are callable, which greatly increases the risk. But if you use leverage to buy your personal residence and then invest the difference in stocks you don't have to worry about the loan being pulled out from under you. If there were 30-year unsecured non-callable loans available for a reasonable interest rate it would definitely make financial sense. These just simply don't exist.

correct we could all just quit working today and take out a huge loan of non callable debt and invest it in equities.

the_fixer

  • Bristles
  • ***
  • Posts: 367
  • Location: Colorado
  • mind on my money money on my mind
Re: Equity shaming
« Reply #181 on: August 07, 2018, 10:06:22 AM »
So what interest rate is the breaking point?

Sent from my Pixel 2 XL using Tapatalk

Depends on where you're at in the investment order. And if you still get a tax deduction which is unlikely.  However with the cfiresim I ran even doing 7% cash out refinances improved success rate when done every 10 years with assumed house value appreciation of 3% annually.
The first house we purchased was at 7.7 and I remember my father in law telling me how amazingly low that was compared to the rate they paid on their house if I remember correctly it was around 13 or 14%

Our second house was 6.2%

Out of curiosity I googled historical mortgage interest rates and came across the following link

https://www.valuepenguin.com/mortgages/historical-mortgage-rates#nogo

8.21 average 1971 - 2017

Fast forward to our current house and our rate is 2.875 so I am in no hurry to pay it off but suspect that was a once in a lifetime event.


Sent from my Pixel 2 XL using Tapatalk


OurTown

  • Pencil Stache
  • ****
  • Posts: 853
  • Age: 48
  • Location: Tennessee
Re: Equity shaming
« Reply #182 on: August 07, 2018, 10:08:27 AM »
^^^ Very logical. ^^^

kite

  • Pencil Stache
  • ****
  • Posts: 569
Re: Equity shaming
« Reply #183 on: August 07, 2018, 10:19:29 AM »
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.

Because it's not foolproof.  Because it's an incredible risk.

If you want foolproof, put everything in CDs and wait for your social security.

Guaranteed to prevent FIRE.

On this site, it's the proof you are a fool.

Did I say I want foolproof?  I'm just poking holes in the blog post that was hosted by Forbes.  The kid got lucky with some real estate in Alaska.  And he believes that luck is a formula which can be replicated.  He's endorsed by a con artist and fraud. 

My career is in electronic trading systems.  I want y'all to put your money there.  I also own rental property, because it's the perfect hedge against those inevitable downturns turns for someone in my circumstances.

Scortius

  • Bristles
  • ***
  • Posts: 417
Re: Equity shaming
« Reply #184 on: August 07, 2018, 10:22:33 AM »
Also, to answer the earlier question yet another way. Just about every bank these days acts as a loan originator, but they do not service the loan themselves. Rather, the loans are immediately sold to Fannie Mae or Freddie Mac, which are government organizations created to help soften the housing market for American home buyers.

https://www.fhfa.gov/SupervisionRegulation/FannieMaeandFreddieMac/Pages/About-Fannie-Mae---Freddie-Mac.aspx

Long story short, banks aren't sitting on 3.5% mortgages.

mak1277

  • Pencil Stache
  • ****
  • Posts: 722
Re: Equity shaming
« Reply #185 on: August 07, 2018, 10:45:52 AM »
If the market crashes I've clearly lost something.

What exactly is your plan for funding FIRE?

3% WR, 50% equity, 50% bonds/cash

So if I offered you a loan at 2.9% for 30 years, non-callable no strings attached, would you take it and invest in 50/50 equities/bonds or would you decline?

I'd decline because I don't need it.  I can't say what my reaction would be if I wasn't on target for FIRE.

mathlete

  • Pencil Stache
  • ****
  • Posts: 731
Re: Equity shaming
« Reply #186 on: August 07, 2018, 11:59:53 AM »
Google sheet: https://docs.google.com/spreadsheets/d/1vifKnir9UtuKnNsnr73wuRzKTQs98HS6tH0z18W2cb8/edit#gid=0

I changed the definition of a "year" from 250 trading days, to 252 trading days. This explains the difference between the success rate that I quoted earlier, and the one that shows up now for a 4.5% loan. Change the rate in the yellow cell to see different success rates. Feel free to let me know if you spot any calculation errors.

BTW I updated this to add a newer, streamlined model that includes dividend reinvestment (in fairness to investors) but also uses the prime rate at the proposed time of the levereging for each scenario. Borrowing on a ten year term at the start of the year between 1950 and 2008 works out about 73% of the time.

Post WWII, we had extremely low interest rates, and a lot of economic growth. This is not unlike what we saw post great recession, and as such, I expect the strategy to work out well for those who could manage it. The proposition becomes less attractive as interest rates are starting to rise, obviously.

I decided that the 20 year and 30 year outputs weren't really meaningful. Such loans usually have a different associated rate, and if that rate were high, I'd prefer to have a stochastic element to the model that accounts for refinance behavior down the line.

FIRE47

  • Bristles
  • ***
  • Posts: 294
Re: Equity shaming
« Reply #187 on: August 07, 2018, 01:47:54 PM »
Google sheet: https://docs.google.com/spreadsheets/d/1vifKnir9UtuKnNsnr73wuRzKTQs98HS6tH0z18W2cb8/edit#gid=0

I changed the definition of a "year" from 250 trading days, to 252 trading days. This explains the difference between the success rate that I quoted earlier, and the one that shows up now for a 4.5% loan. Change the rate in the yellow cell to see different success rates. Feel free to let me know if you spot any calculation errors.

BTW I updated this to add a newer, streamlined model that includes dividend reinvestment (in fairness to investors) but also uses the prime rate at the proposed time of the levereging for each scenario. Borrowing on a ten year term at the start of the year between 1950 and 2008 works out about 73% of the time.

Post WWII, we had extremely low interest rates, and a lot of economic growth. This is not unlike what we saw post great recession, and as such, I expect the strategy to work out well for those who could manage it. The proposition becomes less attractive as interest rates are starting to rise, obviously.

I decided that the 20 year and 30 year outputs weren't really meaningful. Such loans usually have a different associated rate, and if that rate were high, I'd prefer to have a stochastic element to the model that accounts for refinance behavior down the line.

So based on your inputs of 4.5% HELOC which seems about reasonable at this point in time you "should" make 2.45% extra.

What would the tax implications of this be in the US? I'm not going to look into it as I am not in the US and my situation would not be relevant to most posters.

Assuming all of the reinvested distributions are in taxable accounts if you are investing these kinds of dollars.

 It's harder to gauge but also all of the capital appreciation will also be subject to tax eventually even if deferred.
« Last Edit: August 07, 2018, 01:49:38 PM by FIRE47 »

onlykelsey

  • Handlebar Stache
  • *****
  • Posts: 1886
Re: Equity shaming
« Reply #188 on: August 07, 2018, 01:50:59 PM »

 It's harder to gauge but also all of the capital appreciation will also be subject to tax eventually even if deferred.

I'm not in the "perpetual HELOC to invest" camp, but if you're living in your home, you can still exclude 250K or 500K if filing jointly (https://www.irs.gov/taxtopics/tc701) in the US, unless I'm missing something.

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 1214
  • Location: Seattle, WA
Re: Equity shaming
« Reply #189 on: August 07, 2018, 01:55:34 PM »
Google sheet: https://docs.google.com/spreadsheets/d/1vifKnir9UtuKnNsnr73wuRzKTQs98HS6tH0z18W2cb8/edit#gid=0

I changed the definition of a "year" from 250 trading days, to 252 trading days. This explains the difference between the success rate that I quoted earlier, and the one that shows up now for a 4.5% loan. Change the rate in the yellow cell to see different success rates. Feel free to let me know if you spot any calculation errors.

BTW I updated this to add a newer, streamlined model that includes dividend reinvestment (in fairness to investors) but also uses the prime rate at the proposed time of the levereging for each scenario. Borrowing on a ten year term at the start of the year between 1950 and 2008 works out about 73% of the time.

Post WWII, we had extremely low interest rates, and a lot of economic growth. This is not unlike what we saw post great recession, and as such, I expect the strategy to work out well for those who could manage it. The proposition becomes less attractive as interest rates are starting to rise, obviously.

I decided that the 20 year and 30 year outputs weren't really meaningful. Such loans usually have a different associated rate, and if that rate were high, I'd prefer to have a stochastic element to the model that accounts for refinance behavior down the line.

Good stuff.  Likes like the 30 year doesn't start to fail until you get to about prime rate of about 10%.   It was even positive for fairly high prime rates, like 7.5%-ish. 

FIRE47

  • Bristles
  • ***
  • Posts: 294
Re: Equity shaming
« Reply #190 on: August 07, 2018, 01:59:14 PM »

 It's harder to gauge but also all of the capital appreciation will also be subject to tax eventually even if deferred.

I'm not in the "perpetual HELOC to invest" camp, but if you're living in your home, you can still exclude 250K or 500K if filing jointly (https://www.irs.gov/taxtopics/tc701) in the US, unless I'm missing something.

Was more referring to the investment gains.

However there is another good point is the interest on the investment loan tax deductible? This could tip things greatly in favour of borrowing depending on your situation for some people this might effectively cut the interest rate in half.

Mortgage interest is not deductible in Canada however it is for investment purposes.

robartsd

  • Handlebar Stache
  • *****
  • Posts: 1663
  • Location: Northern California
Re: Equity shaming
« Reply #191 on: August 07, 2018, 04:11:38 PM »
What would the tax implications of this be in the US? I'm not going to look into it as I am not in the US and my situation would not be relevant to most posters.
I'm still a bit confused on the new mortgage interest deduction rules; but I don't think taping the equity in your primary home to invest in stocks results in tax-deductible interest any more. Mortgage interest deduction was always an itemized deduction, so even if it is deductible, that only really counts to the extent that your itemized deductions exceed the standard deduction.

Assuming the mortgage interest is not deductible, the tax implication could significantly eat into the margin (reducing it to about 1.45%: 7% investment return * .85 after tax - 4.5% interest) if you realize the gain in a year that had high income (over $38,600 per taxpayer); however, you have some control over when you realize the gains - if you hold tax efficiently until you FIRE, you could avoid paying taxes on the return (assuming tax law remains similar in year the gains are realized).

boarder42

  • Walrus Stache
  • *******
  • Posts: 7478
Re: Equity shaming
« Reply #192 on: August 07, 2018, 05:06:30 PM »
It's not deductible anymore for a majority of of tax payers since they capped salt at 10k and moved the standard deduction to 24k. Prior or salt taxes were 17k and all our mortgage interest was deductible. Now we don't have enough interest to even make donations deductible after 10k plus mortgage interest. It's highly unlikely anyone upper middle and down will get real value out of the deduction like we used to.

FIRE47

  • Bristles
  • ***
  • Posts: 294
Re: Equity shaming
« Reply #193 on: August 07, 2018, 07:37:36 PM »
It's not deductible anymore for a majority of of tax payers since they capped salt at 10k and moved the standard deduction to 24k. Prior or salt taxes were 17k and all our mortgage interest was deductible. Now we don't have enough interest to even make donations deductible after 10k plus mortgage interest. It's highly unlikely anyone upper middle and down will get real value out of the deduction like we used to.

It is deductible in Canada which would reduce your effective interest expense by 30-50% for most people considering this, at least during accumulation.

Malkynn

  • Handlebar Stache
  • *****
  • Posts: 1001
Re: Equity shaming
« Reply #194 on: August 08, 2018, 06:04:20 AM »
It's not deductible anymore for a majority of of tax payers since they capped salt at 10k and moved the standard deduction to 24k. Prior or salt taxes were 17k and all our mortgage interest was deductible. Now we don't have enough interest to even make donations deductible after 10k plus mortgage interest. It's highly unlikely anyone upper middle and down will get real value out of the deduction like we used to.

It is deductible in Canada which would reduce your effective interest expense by 30-50% for most people considering this, at least during accumulation.

Isnít it only deductible in Canada if you do a Smith Maneuver? The interest on the initial mortgage isnít tax deductible.

FIRE47

  • Bristles
  • ***
  • Posts: 294
Re: Equity shaming
« Reply #195 on: August 08, 2018, 06:43:38 AM »
It's not deductible anymore for a majority of of tax payers since they capped salt at 10k and moved the standard deduction to 24k. Prior or salt taxes were 17k and all our mortgage interest was deductible. Now we don't have enough interest to even make donations deductible after 10k plus mortgage interest. It's highly unlikely anyone upper middle and down will get real value out of the deduction like we used to.

It is deductible in Canada which would reduce your effective interest expense by 30-50% for most people considering this, at least during accumulation.

Isnít it only deductible in Canada if you do a Smith Maneuver? The interest on the initial mortgage isnít tax deductible.


Yea exactly - but in this case I'm assuming the Smith Maneuver would be a no brainer.

Dragonswan

  • Stubble
  • **
  • Posts: 237
  • Location: Between realms
Re: Equity shaming
« Reply #196 on: August 08, 2018, 07:04:17 AM »
It's not deductible anymore for a majority of of tax payers since they capped salt at 10k and moved the standard deduction to 24k. Prior or salt taxes were 17k and all our mortgage interest was deductible. Now we don't have enough interest to even make donations deductible after 10k plus mortgage interest. It's highly unlikely anyone upper middle and down will get real value out of the deduction like we used to.

Except those of us who are upper middle, towards the beginning of paying our large mortgage (payments are mostly interest) and single (standard deduction is only 12K).  I'm one of the few who will still be itemizing, but will get shafted by not being able to claim all my SALT.

boarder42

  • Walrus Stache
  • *******
  • Posts: 7478
Re: Equity shaming
« Reply #197 on: August 08, 2018, 07:15:55 AM »
It's not deductible anymore for a majority of of tax payers since they capped salt at 10k and moved the standard deduction to 24k. Prior or salt taxes were 17k and all our mortgage interest was deductible. Now we don't have enough interest to even make donations deductible after 10k plus mortgage interest. It's highly unlikely anyone upper middle and down will get real value out of the deduction like we used to.

Except those of us who are upper middle, towards the beginning of paying our large mortgage (payments are mostly interest) and single (standard deduction is only 12K).  I'm one of the few who will still be itemizing, but will get shafted by not being able to claim all my SALT.

correct previously SALT got you and us above the deduction.  so now not all of your interest is deductible only after the first 7k for single correct? since SALT for you is likely capped at 5k?

Dicey

  • Walrus Stache
  • *******
  • Posts: 8030
  • Age: 60
  • Location: NorCal
Re: Equity shaming
« Reply #198 on: August 08, 2018, 07:18:13 AM »
So what interest rate is the breaking point?
Depends on where you're at in the investment order. And if you still get a tax deduction which is unlikely.  However with the cfiresim I ran even doing 7% cash out refinances improved success rate when done every 10 years with assumed house value appreciation of 3% annually.
The first house we purchased was at 7.7 and I remember my father in law telling me how amazingly low that was compared to the rate they paid on their house if I remember correctly it was around 13 or 14%

Our second house was 6.2%

Out of curiosity I googled historical mortgage interest rates and came across the following link

https://www.valuepenguin.com/mortgages/historical-mortgage-rates#nogo

8.21 average 1971 - 2017

Fast forward to our current house and our rate is 2.875 so I am in no hurry to pay it off but suspect that was a once in a lifetime event.
Yes! My POV is slightly different than b42's, but we agree on this main point: Years from now, the US- based folks who paid off their super cheap mortgages, at the expense of other investing, are going to be kicking their future selves in the ass.

@the_fixer, feel free to hang out over here:

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

Dragonswan

  • Stubble
  • **
  • Posts: 237
  • Location: Between realms
Re: Equity shaming
« Reply #199 on: August 08, 2018, 07:43:48 AM »
It's not deductible anymore for a majority of of tax payers since they capped salt at 10k and moved the standard deduction to 24k. Prior or salt taxes were 17k and all our mortgage interest was deductible. Now we don't have enough interest to even make donations deductible after 10k plus mortgage interest. It's highly unlikely anyone upper middle and down will get real value out of the deduction like we used to.

Except those of us who are upper middle, towards the beginning of paying our large mortgage (payments are mostly interest) and single (standard deduction is only 12K).  I'm one of the few who will still be itemizing, but will get shafted by not being able to claim all my SALT.

correct previously SALT got you and us above the deduction.  so now not all of your interest is deductible only after the first 7k for single correct? since SALT for you is likely capped at 5k?
Nope, I'll still get 10K SALT deduction as far as I can tell (used the online calculator to determine correct withholding and it capped at 10K not 5K), but my SALT is still higher than that.  The mortgage interest or SALT alone previously put me above the standard deductions. Under the old rules I have between 24-26K in itemized deductions depending on donations.  Now I'll have around 21-22K in deductions.  They also changed the tax brackets such that when I get my next raise I'll be in the 32% bracket, previously I had a lot more room in the 28% bracket.  The truly aggravating part is that the tax laws will expire the year I FIRE, when I will then actually have been able to come out ahead in that aspect.