Author Topic: Equity shaming  (Read 9548 times)

mathlete

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Re: Equity shaming
« Reply #50 on: July 31, 2018, 04:26:29 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.
« Last Edit: July 31, 2018, 04:29:14 PM by mathlete »

boarder42

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Re: Equity shaming
« Reply #51 on: July 31, 2018, 05:03:50 PM »
I don't know why you're making a calculator cfiresim solved this for you

mathlete

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Re: Equity shaming
« Reply #52 on: July 31, 2018, 05:15:23 PM »
I don't know why you're making a calculator cfiresim solved this for you

1.) Intellectual curiosity, specifically as it relates to financial and mathematical subjects, is part and parcel to why I am who I am. Put another way, on balance, the subset of universes where I don't build the model are worse than the ones where I do, because they include universes in which I'm measurably less curious about such things.

2.) I read your posts and the scenarios you posit. Then I opened cfiresim. I honestly couldn't figure out how to incorporate loans without significant bootstrapping.

3.) I was interested in results beyond what the impact was on X years of survival at a Y% withdraw rate.

genesismachine

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Re: Equity shaming
« Reply #53 on: July 31, 2018, 05:46:37 PM »
1 - All this assumes inflation. If there is a deflationary spiral, you may not be able to hold onto the home long enough for the long run if you are very very leveraged relative to your income
2 - All this assumes the stock market goes up in the future as it has in the past. There are examples (like Japan for the last 30 years) of extended periods of 0 or even negative growth.

But the general point is sound. I've been seeing people talk about 4% inflation becoming the new normal for a while in order to inflate away the huge amount of corporate and government debt over the next couple decades. If that is the case, if you have 4% inflation and you're borrowing money at 4.5%, it's going to be really tough to lose money over this span if invested even remotely wisely.

Hargrove

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Re: Equity shaming
« Reply #54 on: July 31, 2018, 08:42:31 PM »
"Risk" ... also refers to an investors comfort with short and medium term volatility.

The investor's comfort is risk tolerance, not risk, and investor comfort is not always objectively correlated to risk. Risk also changes dramatically with a time horizon. Holding cash is risky as hell, unless we're talking for a day or two. Leveraging your house for index funds is not safe, but nothing's safe, including cash. Optimal investing is not aiming for safety - it's aiming for efficiency in a given time horizon.

Those who said interest rates increase how hard your money has to work in the market are correct, but you have none of that money working in the market at all if it's equity in your house. Treasury bonds are already almost up to the lowest mortgage rates. Could you lose something in a moment with a huge crash if you panic and sell? Sure, but, that was true anyway.

At the end of the day, this kind of leverage is just making the same bet you already made to make money in the first place, with money you don't have except that you accept it with an interest rate that's magically low only if it's backed up by a home. Then you have to beat that rate. I would want to keep making the money on my house work for me, but for those who find this idea terrifying, the math doesn't always erase the emotional cost. There is still, however, real risk in owning a non-movable tangible asset that's the bulk of your net-worth, just like there's real risk in owning cash - the value of things simply changes (with cash almost only down), and you can't opt out of that game. The closest things to "safety" are minimal expenses + long-term compounding.

I wouldn't say this article is really all that full of "shaming," but it certainly has a tone that sounds deceptively casual about leveraging your house. There's definitely a set of rules about what to do and what not to that may be obvious to many of us, but which are not exactly well-explored for the average reader.
« Last Edit: July 31, 2018, 08:44:58 PM by Hargrove »

Raymond Reddington

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Re: Equity shaming
« Reply #55 on: August 01, 2018, 01:12:49 AM »
That is not necessarily 100% true. You have to consider what is lost in full ownership. For instance having $500k tied up in fully owned home is potential interest lost. Because you could have the full value of the home invested in an interest bearing account.

Also owning a home has to factor in the continuing costs of taxes, repair probably an HOA. Those plus any opportunity cost have to weighed against renting.

I would generally agree with you more on the point that buying is more of a guarantee of cost stability since you are protected from rapid changes in rent with future inflation. But this is not by any means guaranteed to come out in favor of owning every time.

I would argue that the investment return on outright ownership (and, even having a fixed rate monthly mortgage payment until the loan is paid off) is the fact that you have no longer rent expense, which typically outpaces inflation in most markets. The fact that your cost of living is not rising with or beyond inflation is a return on capital in and of itself.

If you rent, property taxes, repairs, etc. are all factored into the landlord's expenses when determining a market rent so as to cover all expenses AND generate profit. Plus renting has no tax benefits. Deducted mortgage interest can then be invested in the market, whereas money spent on rent (which includes landlord profit) is not deductible. As the saying goes, you still pay a mortgage when you rent, it's just someone else's. But I agree that ownership does not always make sense - especially in cases where it becomes necessary to relocate frequently.

But there is something to be said for cost certainty, as you mention. I also believe that the tax benefits lend themselves to someone investing the money wisely based on life cycle - a younger person early in their mortgage has the most tax deductible mortgage interest up front, and can thus invest this money for higher returns at a time where they have their highest risk tolerance profile - allowing for the greatest possible returns (on average) in youth, and getting the most money in the market as early as possible while the tax benefit of owning is greatest. Over time, the effect of the reduced mortgage interest tax deduction as the principle of the loan is reduced plus increases in property taxes based on property value or rates, roughly simulate inflation, but don't typically exceed it. This, of course, is balanced by wage increases and growing investment returns. Then, at the part of the life cycle where the typical investor (a 30 year mortgage payer) desires to reduce sequence risk, the loan is paid off in full, which drops costs significantly heading into retirement.

As intended, it's a well designed system. But I do see your point. The problem is more people are pursuing homeownership later in life than ever, which is causing this formula to break. You have people still paying off mortgages well into their retirement years, or who have mortgages in excess of their life expectancy (sometimes adjustable rate!), or tapping their equity constantly and refinancing left and right so the loan exists in perpetuity...so for these people renting may well be the better deal.

runbikerun

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Re: Equity shaming
« Reply #56 on: August 01, 2018, 02:34:07 AM »
It's interesting to see these conversations about pulling equity out of a property in order to invest. I work in financial services in a European country, and doing this is not merely rare, it's functionally impossible: banks will flat-out refuse to entertain an increase on a mortgage balance except for very specific purposes, and "investment" is formally specified by most banks as something they simply will not consider a legitimate purpose for additional borrowing against a property.


FIRE47

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Re: Equity shaming
« Reply #57 on: August 01, 2018, 04:39:56 AM »
"Risk" ... also refers to an investors comfort with short and medium term volatility.

The investor's comfort is risk tolerance, not risk, and investor comfort is not always objectively correlated to risk. Risk also changes dramatically with a time horizon. Holding cash is risky as hell, unless we're talking for a day or two. Leveraging your house for index funds is not safe, but nothing's safe, including cash. Optimal investing is not aiming for safety - it's aiming for efficiency in a given time horizon.

Those who said interest rates increase how hard your money has to work in the market are correct, but you have none of that money working in the market at all if it's equity in your house. Treasury bonds are already almost up to the lowest mortgage rates. Could you lose something in a moment with a huge crash if you panic and sell? Sure, but, that was true anyway.

At the end of the day, this kind of leverage is just making the same bet you already made to make money in the first place, with money you don't have except that you accept it with an interest rate that's magically low only if it's backed up by a home. Then you have to beat that rate. I would want to keep making the money on my house work for me, but for those who find this idea terrifying, the math doesn't always erase the emotional cost. There is still, however, real risk in owning a non-movable tangible asset that's the bulk of your net-worth, just like there's real risk in owning cash - the value of things simply changes (with cash almost only down), and you can't opt out of that game. The closest things to "safety" are minimal expenses + long-term compounding.

I wouldn't say this article is really all that full of "shaming," but it certainly has a tone that sounds deceptively casual about leveraging your house. There's definitely a set of rules about what to do and what not to that may be obvious to many of us, but which are not exactly well-explored for the average reader.

I understand - the first part is just semantics which is why I put "risk" in quotations and I apologize for not being more clear - risk tolerance is a real thing, and people do lose even using optimal strategies, and sometimes optimal strategies expose you to larger losses especially in the short term. Everyone in the US is gung-ho now, as they haven't been tested in almost a decade at this point.

Life is not just a calculator - what happens to someone with a low risk tolerance who adopts this strategy imparts a very real potential cost on their future quality of life and mental well being. You can't just trace the lines along the chart to see that you'll be fine into the future, it takes years and by then not only have they gone through mental anguish and worry, probably slashed their expenses and quality of life but they may very well have cashed out.

Perfect is often the enemy of good enough.

« Last Edit: August 01, 2018, 04:43:52 AM by FIRE47 »

Hargrove

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Re: Equity shaming
« Reply #58 on: August 01, 2018, 04:46:11 AM »
That's really the problem with the article. People can be confident about the math who have researched this for years, but no one who is just starting out will get the full picture from this. The author is more about being right than about being helpful - there's an unmentioned potential for a rollercoaster ride in there, and the responsibility to brace newbies arrived as soon as the author wanted to publish an article on it. He declined to do that.
« Last Edit: August 01, 2018, 04:49:04 AM by Hargrove »

mathlete

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Re: Equity shaming
« Reply #59 on: August 01, 2018, 06:19:43 AM »
That's really the problem with the article. People can be confident about the math who have researched this for years, but no one who is just starting out will get the full picture from this. The author is more about being right than about being helpful - there's an unmentioned potential for a rollercoaster ride in there, and the responsibility to brace newbies arrived as soon as the author wanted to publish an article on it. He declined to do that.


Also,

Quote
Keith Weinhold
Owner at GetRichEducation.com - groundbreaking original real estate investing blogs, podcasts, and videos to help you build passive income.

A few clicks into his website and you see that they offer turn key rental properties. The more people tap their home equity to invest, the more investment dollars there are floating around to buy Keith's rentals. Hence the aggressive sales pitch and the negging.

He closes with,

Quote
Homes are meant to house families, not store cash.

It sounds good. But you could just as easily replace "not store cash" with "not used as collateral in low interest loans."

Mississippi Mudstache

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Re: Equity shaming
« Reply #60 on: August 01, 2018, 06:24:11 AM »
The goal of homeownership is the lowered cost of living when you no longer have a mortgage payment. That's what the "investment" is. And any equity that can be liquidated to pursue another home with that same end goal in mind.

A person who rents will never reach that.

The only other goal of homeownership is income, in the case of rental properties.

That is not necessarily 100% true. You have to consider what is lost in full ownership. For instance having $500k tied up in fully owned home is potential interest lost. Because you could have the full value of the home invested in an interest bearing account.

Also owning a home has to factor in the continuing costs of taxes, repair, probably an HOA. Those plus any opportunity cost have to weighed against renting.

Probably not. According to Zillow, only about 1 in 5 American homeowners pay an HOA fee.

Syonyk

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Re: Equity shaming
« Reply #61 on: August 01, 2018, 10:52:48 AM »
It's interesting to see these conversations about pulling equity out of a property in order to invest. I work in financial services in a European country, and doing this is not merely rare, it's functionally impossible: banks will flat-out refuse to entertain an increase on a mortgage balance except for very specific purposes, and "investment" is formally specified by most banks as something they simply will not consider a legitimate purpose for additional borrowing against a property.

It's not increasing the mortgage balance - it's getting a second mortgage, or HELOC (Home Equity Line of Credit).  Which is totally different!  Somehow.

European logic on this is probably the reasonable way to go...

Retire-Canada

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Re: Equity shaming
« Reply #62 on: August 01, 2018, 11:01:21 AM »
It's interesting to see these conversations about pulling equity out of a property in order to invest. I work in financial services in a European country, and doing this is not merely rare, it's functionally impossible: banks will flat-out refuse to entertain an increase on a mortgage balance except for very specific purposes, and "investment" is formally specified by most banks as something they simply will not consider a legitimate purpose for additional borrowing against a property.

In North America you are free to renegotiate most mortgages at anytime [with fees depending on your contract]. If you own a home valued at $1M and currently have $200K mortgage you can ask to have a $700K mortgage pulling out $500K in equity. You don't need to give any reason for this. It's nobody's business, but you do have to have the income to support a $700K mortgage and you do need to leave enough equity in the home to keep the lender happy. What those requirements are will vary from jurisdiction to jurisdiction.

You can also take money out via a HELOC and again you are not required to explain why. You just have to have enough home equity and income to support the HELOC approval.

PizzaSteve

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Re: Equity shaming
« Reply #63 on: August 01, 2018, 11:20:59 AM »
1 - All this assumes inflation. If there is a deflationary spiral, you may not be able to hold onto the home long enough for the long run if you are very very leveraged relative to your income
2 - All this assumes the stock market goes up in the future as it has in the past. There are examples (like Japan for the last 30 years) of extended periods of 0 or even negative growth.

But the general point is sound. I've been seeing people talk about 4% inflation becoming the new normal for a while in order to inflate away the huge amount of corporate and government debt over the next couple decades. If that is the case, if you have 4% inflation and you're borrowing money at 4.5%, it's going to be really tough to lose money over this span if invested even remotely wisely.
+1

Furthermore, if at a certain point in the future, the sequence of returns on stocks work in your favor, then your stash may actually become over funded. 

Since we all agree increasing spending when you have more than you need is silly and perhaps harmful to the planet, at that point it makes sense to deleverage and just treat your home like a car or any other non-investment asset.  Sure you can earn more money under most scenarios with leverage, but why earn more money that is useless vs increasing control of your property and having peace of mind that no bank can tell you what you should or should not do with your property, plus less SOR risk of FI failure?

Just putting that out there for the OP who called the articles conclusion that someone with home equity an idiot.  I think people who endlessly pursue wealth and forget that it is a tool for a good life appoach that status.

Namaste.

PS.  Agree we dont need to recreate the wisdom of mortgage/equity leverage strategies vs conservative investing debates.  Depends on each person and circumstances once a full education about options is achieved. Appretiate the efforts to educate.
« Last Edit: August 01, 2018, 11:27:24 AM by PizzaSteve »

Retire-Canada

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Re: Equity shaming
« Reply #64 on: August 01, 2018, 11:27:09 AM »
Furthermore, if at a certain point in the future, the sequence of returns on stocks work in your favor, then your stash may ne actually over funded. 

Since we all agree increasing spending when you have more than you need is silly and perhaps harmful to the planet, at that point it makes sense to deleverage and just treat your home like a car or any other non-investment asset.  Sure you can earn more money under most scenarios with leverage, but why earn more money that is useless vs increasing control of your property and having peace of mind that no bank can tell you what you shoukd or should not do with your property?

If I was at a 2%WR or even a 3%WR on a luxurious budget I wouldn't bother with keeping a mortgage to invest the equity. Not because I think it's risky, but because it's once less thing to manage/think about and I would have more money than I could use.

OTOH at 4%WR or 5%WR on an aggressive budget it's worth the trouble and having more money is beneficial at this point.

boarder42

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Re: Equity shaming
« Reply #65 on: August 01, 2018, 02:00:07 PM »
Furthermore, if at a certain point in the future, the sequence of returns on stocks work in your favor, then your stash may ne actually over funded. 

Since we all agree increasing spending when you have more than you need is silly and perhaps harmful to the planet, at that point it makes sense to deleverage and just treat your home like a car or any other non-investment asset.  Sure you can earn more money under most scenarios with leverage, but why earn more money that is useless vs increasing control of your property and having peace of mind that no bank can tell you what you shoukd or should not do with your property?

If I was at a 2%WR or even a 3%WR on a luxurious budget I wouldn't bother with keeping a mortgage to invest the equity. Not because I think it's risky, but because it's once less thing to manage/think about and I would have more money than I could use.

OTOH at 4%WR or 5%WR on an aggressive budget it's worth the trouble and having more money is beneficial at this point.

i look at this the other way your money doesnt have to be spent on extra shit.  your money can help people.  so sure if you make it to 2-3% you could deleverage for simplicity but it really doesnt simplify things all that much vs the extra money i could give away to help those less fortunate.  Extra money doesnt have to be spent on planes trains and automobiles it can be spent on food and resources to help sustain the planet.

Retire-Canada

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Re: Equity shaming
« Reply #66 on: August 01, 2018, 02:15:49 PM »
i look at this the other way your money doesnt have to be spent on extra shit.  your money can help people.  so sure if you make it to 2-3% you could deleverage for simplicity but it really doesnt simplify things all that much vs the extra money i could give away to help those less fortunate.  Extra money doesnt have to be spent on planes trains and automobiles it can be spent on food and resources to help sustain the planet.

If I hit a 2%WR or 3%WR I'll most likely be giving away millions as is. Given how simple my life is not having a mortgage would be a big difference to me.

Since I have not even hit 5%WR yet this ^^^ is a theoretical discussion and I am more than happy to maintain a mortgage and invest more vs. paying it off. At the moment I have a use for the next $1.

clarkfan1979

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Re: Equity shaming
« Reply #67 on: August 02, 2018, 12:45:28 PM »
I think how much you leverage is going to be negatively correlated with how close you are to your FI number. In the beginning you want to maximize leverage to maximize gains. Once you hit your FI number and you have "enough" the purpose of leverage is unnecessary.

I have some friends that are about 15 years old than me and we have some wonderful real estate conversations. We often talk about how we are in two different spots in terms of wanting to leverage. They have a handful of rentals that are paid off. They are FI and have everything they want. Leverage for them would be unnecessary.

For me, I am leveraged because I'm 15 years behind them and not FI. However, I plan to be FI in 8 years and will start to de-leverage. I could see all my rental properties being paid off in 15 years.

mak1277

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Re: Equity shaming
« Reply #68 on: August 03, 2018, 08:52:12 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.

boarder42

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Re: Equity shaming
« Reply #69 on: August 03, 2018, 09:42:42 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? 

Maenad

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Re: Equity shaming
« Reply #70 on: August 03, 2018, 12:03:02 PM »
This is just eerie. Didn't we, just a decade ago, see people pull out tons of equity from their homes, then lose jobs, then their retirement investments, then their homes? Have we forgotten just how bad leveraging can go?

I mean, if you have 6+ months' expenses in cash equivalents, go ahead and leverage away, but then you're "losing out" only getting savings account/money market rates on that money.

And don't think you could just "live on credit until another job comes along" - credit markets were tightened up significantly during the Great Recession, and safety nets like unused HELOCs were closed down.

I see nothing wrong with carrying a mortgage, and I know that cFIREsim says leveraging is, on average, better than not, but we just saw the perfect storm of people losing everything. It's not theoretical. And there's nothing to stop the banks from doing it again.

Syonyk

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Re: Equity shaming
« Reply #71 on: August 03, 2018, 12:23:39 PM »
So you're very happy you worked longer? And very happy you have less money?

Some people just don't like carrying debt, and prefer to be debt free and own their house.  So, if someone falls into that category, then the reduced mental stress of having a paid off mortgage and no debt may, in fact, lead to a happier life.

I'm in that category, as is my wife.  To both of us, not having debt is worth an awful lot, mental stress wise.  And if we end up with slightly less money in the long run, well, that's fine with us.  And we have zero interest in using our home to borrow against for things.

This is just eerie. Didn't we, just a decade ago, see people pull out tons of equity from their homes, then lose jobs, then their retirement investments, then their homes? Have we forgotten just how bad leveraging can go?

Apparently, yes.  We tend to have short collective memories of stuff like that.

boarder42

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Re: Equity shaming
« Reply #72 on: August 03, 2018, 12:34:03 PM »
This is just eerie. Didn't we, just a decade ago, see people pull out tons of equity from their homes, then lose jobs, then their retirement investments, then their homes? Have we forgotten just how bad leveraging can go?

I mean, if you have 6+ months' expenses in cash equivalents, go ahead and leverage away, but then you're "losing out" only getting savings account/money market rates on that money.

And don't think you could just "live on credit until another job comes along" - credit markets were tightened up significantly during the Great Recession, and safety nets like unused HELOCs were closed down.

I see nothing wrong with carrying a mortgage, and I know that cFIREsim says leveraging is, on average, better than not, but we just saw the perfect storm of people losing everything. It's not theoretical. And there's nothing to stop the banks from doing it again.

You actually need to be carrying more cash on hand if you're paying down amortgage vs investing. Bc I have all my investments that can be tapped if you lose your job the bank still wants their money. So typically people paying down their mortgage have more cash sidelined than those investing.

Telecaster

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Re: Equity shaming
« Reply #73 on: August 03, 2018, 01:06:21 PM »
This is just eerie. Didn't we, just a decade ago, see people pull out tons of equity from their homes, then lose jobs, then their retirement investments, then their homes? Have we forgotten just how bad leveraging can go?

I mean, if you have 6+ months' expenses in cash equivalents, go ahead and leverage away, but then you're "losing out" only getting savings account/money market rates on that money.

And don't think you could just "live on credit until another job comes along" - credit markets were tightened up significantly during the Great Recession, and safety nets like unused HELOCs were closed down.

I see nothing wrong with carrying a mortgage, and I know that cFIREsim says leveraging is, on average, better than not, but we just saw the perfect storm of people losing everything. It's not theoretical. And there's nothing to stop the banks from doing it again.

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. 

So to use your scenario, it is 2009 all over again only let's say you haven't quite paid off your house quite yet.  You lose your job, then your retirement savings, and then house along with your down payment all the extra payments you made (minus any equity the bank decides to return to you, after they extract their enormous fees, and at a time of their chosing). 

But if you had been investing instead, you have enough set aside plenty of money continue to make the payments, very likely for years if needs be. 

The usual advice is to keep six months (or some other amount) in cash at all times in case the above disaster scenario happens.  That's fine, but the need for substantial cash reserves before you even start is proof positive of how risky paying down down the mortgage really is.  You need a safety net before even thinking about walking on that high wire.  On the flip side, you don't need any special cash reserves to begin investing.  You just being investing, and the green soldiers start working for you right way.  If you need cash, it is the click of a mouse away.   Try getting money out of your house that fast.  And as you point, during difficult economic times, the bank may not let you borrow at all. 

The reality is, over a say, 15-year period or however it long it takes you to pay off the mortgage, there is a decent chance that you or partner will lose their jobs, become sick, get divorced, or there will be some other reason why you need money.   And if the money is in the house you either can't get it, or it will be expensive and difficult to access.  I'm very risk averse, so I keep my money out of the house. 

risky4me

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Re: Equity shaming
« Reply #74 on: August 03, 2018, 01:12:45 PM »
Just what this forum needed - another thread debating paying off mortgages!

The author was even more pompous and arragont than the folks in the DONíT pay off your mortgage thread.  Iím paying mine off.  I need to own the castle.
Agreed. Many of the 'shame' arguments seem to address this decision based only on squeezing the dollar. Wife and I paid off our 30 year mortgage after 12 years which gave us the ability to increase our investments but most importantly, I cannot convey how much happiness and pride we felt about being 100% debt free- it gave us a feeling of increased freedom. Everyone has different criteria, but for us it was a total win. Bring on the flames. 
« Last Edit: August 03, 2018, 02:22:18 PM by risky4me »

LoanShark

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Re: Equity shaming
« Reply #75 on: August 03, 2018, 01:13:51 PM »
So you're very happy you worked longer? And very happy you have less money?

Some people just don't like carrying debt, and prefer to be debt free and own their house.  So, if someone falls into that category, then the reduced mental stress of having a paid off mortgage and no debt may, in fact, lead to a happier life.

I'm in that category, as is my wife.  To both of us, not having debt is worth an awful lot, mental stress wise.  And if we end up with slightly less money in the long run, well, that's fine with us.  And we have zero interest in using our home to borrow against for things.

This is just eerie. Didn't we, just a decade ago, see people pull out tons of equity from their homes, then lose jobs, then their retirement investments, then their homes? Have we forgotten just how bad leveraging can go?

Apparently, yes.  We tend to have short collective memories of stuff like that.

Same here. I get the opportunity cost; just drastically prefer the peace of mind that comes from not having debt.

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Re: Equity shaming
« Reply #76 on: August 03, 2018, 01:34:55 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?

bacchi

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Re: Equity shaming
« Reply #77 on: August 03, 2018, 01:42:03 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?

Eventually. Of course, the bank could fire sale it to get it off their books, in which case your equity drops considerably based on the sales price. The bank also charges auction costs.

https://homeguides.sfgate.com/basic-foreclosure-fees-costs-61248.html

Quote
As of 2008, it cost lenders an average of $50,000 to foreclose a defaulting homeowner's property.

That may include late payments and late charges but any equity is going to take a hit.

FIRE47

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Re: Equity shaming
« Reply #78 on: August 03, 2018, 01:42:46 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?

Yes you do

GuitarStv

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Re: Equity shaming
« Reply #79 on: August 03, 2018, 01:45:59 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?

Eventually. Of course, the bank could fire sale it to get it off their books, in which case your equity drops considerably based on the sales price. The bank also charges auction costs.

https://homeguides.sfgate.com/basic-foreclosure-fees-costs-61248.html

Quote
As of 2008, it cost lenders an average of $50,000 to foreclose a defaulting homeowner's property.

That may include late payments and late charges but any equity is going to take a hit.

Granted it's not the most efficient thing to do, but that's a worst case scenario . . . and in that scenario you typically do have security without fully paying off the mortgage, right?

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Re: Equity shaming
« Reply #80 on: August 03, 2018, 01:46:35 PM »
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?

We started paying ours down as quick as we could around when we started trying for kids. It was gone by the time #1 was two. OH never went back to work after the birth, I went 3d/wk as soon as the mortgage was paid off.

Without the mortgage, our outgoings are low enough that we've still got a ~40% savings rate even on our much reduced income. If we still had the mortgage payment, it would suck up all that margin. No saving, no way of replenishing and emergency fund without pulling money back out of investments.  No fixing rates for 30 years here in the UK, so no guarantee the payment wouldn't rise. So in practice we wouldn't have the lifestyle we currently do because it would be fairly precarious. As it is, it's pretty low stress. We could cover our remaining outgoings on a single (5d/wk) minimum wage job if we had to.

Not disputing the probability that if we'd put all that money into the markets we'd have more money in a decade or so's time. Also not claiming it was a particularly informed decision at the time - it's only later on that I've become aware of the likelihood of markets outperforming mortgage rates.

But would I act differently at that point in time with my current knowledge? I don't think so.

Give me a chance to go several years further back in time and persuade myself of the merits of being FIRE pre-kids, maybe.

But spending the first part of my kids life leveraged up to the eyeballs and stuck working full time in the promise of having more money some way down the line? Hmm...


Personal circumstances, personal attitude to risk, etc. But yes, pretty happy with it, and will still be FI 8-10 years from now.

I'm sure there's plenty of other scenarios where the statistically measured way of accumulating the biggest pile of money doesn't line up with the most fulfilling outcome.



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Re: Equity shaming
« Reply #81 on: August 03, 2018, 01:50:52 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?

Eventually. Of course, the bank could fire sale it to get it off their books, in which case your equity drops considerably based on the sales price. The bank also charges auction costs.

https://homeguides.sfgate.com/basic-foreclosure-fees-costs-61248.html

Quote
As of 2008, it cost lenders an average of $50,000 to foreclose a defaulting homeowner's property.

That may include late payments and late charges but any equity is going to take a hit.
The rational thing to do is sell your house shortly after you realize you can't afford it instead of waiting to be foreclosed on and evicted from your home. On the other hand, some people have successfully lived in their mortgaged homes free of charge for years before being evicted.

The problem with trying to sell your home in this scenario is, if you got laid off, the general economy is likely weak and your home may be dropping in value at the same time. This points back to the idea of not prepaying your mortgage as being a more effective strategy.

GuitarStv

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Re: Equity shaming
« Reply #82 on: August 03, 2018, 01:54:33 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?

Eventually. Of course, the bank could fire sale it to get it off their books, in which case your equity drops considerably based on the sales price. The bank also charges auction costs.

https://homeguides.sfgate.com/basic-foreclosure-fees-costs-61248.html

Quote
As of 2008, it cost lenders an average of $50,000 to foreclose a defaulting homeowner's property.

That may include late payments and late charges but any equity is going to take a hit.
The rational thing to do is sell your house shortly after you realize you can't afford it instead of waiting to be foreclosed on and evicted from your home. On the other hand, some people have successfully lived in their mortgaged homes free of charge for years before being evicted.

The problem with trying to sell your home in this scenario is, if you got laid off, the general economy is likely weak and your home may be dropping in value at the same time. This points back to the idea of not prepaying your mortgage as being a more effective strategy.

If you got laid off because the economy is weak, and the bank is coming for your home . . . wouldn't cashing in your investments at this low point also be a shitty option?  Or by investments do you guys mean bonds?

Telecaster

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Re: Equity shaming
« Reply #83 on: August 03, 2018, 02:01:30 PM »

If you got laid off because the economy is weak, and the bank is coming for your home . . . wouldn't cashing in your investments at this low point also be a shitty option?  Or by investments do you guys mean bonds?

You only have to cash in one month's expenses at a time.  If you get foreclosed on the whole thing gets "cashed" and it might be months or years before you see a dime of your equity (if you had any). 

FIRE@50

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Re: Equity shaming
« Reply #84 on: August 03, 2018, 02:03:04 PM »
@GuitarStv I was mostly replying to idea that you will lose a lot of equity to foreclosure fees. That can be avoided by selling before you get to that point.

To your point, yes when the economy is shitty, everything tends to look a little scary. You just hope that you aren't one of the ones that gets laid off.

GuitarStv

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Re: Equity shaming
« Reply #85 on: August 03, 2018, 02:04:17 PM »

If you got laid off because the economy is weak, and the bank is coming for your home . . . wouldn't cashing in your investments at this low point also be a shitty option?  Or by investments do you guys mean bonds?

You only have to cash in one month's expenses at a time.  If you get foreclosed on the whole thing gets "cashed" and it might be months or years before you see a dime of your equity (if you had any).

Yeah, but you can keep living in your home until the foreclosure is completed . . . so you're still saving rent for all of those months or years aren't you?
« Last Edit: August 03, 2018, 02:07:03 PM by GuitarStv »

Telecaster

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Re: Equity shaming
« Reply #86 on: August 03, 2018, 02:07:09 PM »

The rational thing to do is sell your house shortly after you realize you can't afford it instead of waiting to be foreclosed on and evicted from your home. On the other hand, some people have successfully lived in their mortgaged homes free of charge for years before being evicted.

The problem with trying to sell your home in this scenario is, if you got laid off, the general economy is likely weak and your home may be dropping in value at the same time. This points back to the idea of not prepaying your mortgage as being a more effective strategy.

Exactly.  In 2008-09 many people's mortgages were underwater and they couldn't sell.  But even if that wasn't the case, there are high transaction costs with selling, so those have to be considered. 

FIRE@50

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Re: Equity shaming
« Reply #87 on: August 03, 2018, 02:08:07 PM »

If you got laid off because the economy is weak, and the bank is coming for your home . . . wouldn't cashing in your investments at this low point also be a shitty option?  Or by investments do you guys mean bonds?

You only have to cash in one month's expenses at a time.  If you get foreclosed on the whole thing gets "cashed" and it might be months or years before you see a dime of your equity (if you had any).

Yeah, but you can keep living in your home until the foreclosure is completed . . . so you're still saving rent for all of those months or years aren't you?
Check your local eviction laws before trying that strategy. Their are some laws to be exploited in some municipalities.

Telecaster

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Re: Equity shaming
« Reply #88 on: August 03, 2018, 02:20:10 PM »

Yeah, but you can keep living in your home until the foreclosure is completed . . . so you're still saving rent for all of those months or years aren't you?

I suppose that's true, I hadn't considered that aspect as a potential benefit.  I would be surprised if after the bank deducted its fees that that this winds up being a money-saving strategy.  Not to mention some serious damage to your credit, which lots of other things (like insurance) become most costly.    I think I'd prefer to simply avoid foreclosure in the first place. 

Ceredwyn

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Re: Equity shaming
« Reply #89 on: August 03, 2018, 02:44:32 PM »
Run the numbers for someone who did this retiring in Japan, cashing out their Tokyo condo to leverage up their Nikkei investments. The idea that this type of strategy reduces risk is a joke.

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Re: Equity shaming
« Reply #90 on: August 03, 2018, 02:54:15 PM »
Run the numbers for someone who did this retiring in Japan, cashing out their Tokyo condo to leverage up their Nikkei investments. The idea that this type of strategy reduces risk is a joke.

By that logic you should never FIRE. Good luck. The entire premise of fire assumed this won't happen.

RWD

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Re: Equity shaming
« Reply #91 on: August 03, 2018, 03:04:46 PM »
Run the numbers for someone who did this retiring in Japan, cashing out their Tokyo condo to leverage up their Nikkei investments. The idea that this type of strategy reduces risk is a joke.

By that logic you should never FIRE. Good luck. The entire premise of fire assumed this won't happen.

The Nikkei is what, 5% of the global market? Of course there's a ton of risk concentrating your investments like that.

Dicey

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Re: Equity shaming
« Reply #92 on: August 04, 2018, 05:52:05 AM »
For those debating risk, the argument I see a lot from the no equity camp is this: let's say you pay your mortgage ahead or have a 15 year loan and build up a lot of equity. And then you lose your job. You cant tap that equity in your home bc nobody will refi or do a heloc for someone without a job. So you could lose your home despite all the equity you've built up. So you're better off investing the money and then if you lose your job you can tap stocks to pay your house payment until you have a job again. This rationale actually makes a ton of sense to me.
And another lightbulb goes off! Winner!

Ultimately, we are all free to make our own decisions. Some of us actually care about helping people make optimal choices on their path to FIRE, which is why we hang around.

GuitarStv

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Re: Equity shaming
« Reply #93 on: August 04, 2018, 04:43:15 PM »
For those debating risk, the argument I see a lot from the no equity camp is this: let's say you pay your mortgage ahead or have a 15 year loan and build up a lot of equity. And then you lose your job. You cant tap that equity in your home bc nobody will refi or do a heloc for someone without a job. So you could lose your home despite all the equity you've built up. So you're better off investing the money and then if you lose your job you can tap stocks to pay your house payment until you have a job again. This rationale actually makes a ton of sense to me.
And another lightbulb goes off! Winner!

Ultimately, we are all free to make our own decisions. Some of us actually care about helping people make optimal choices on their path to FIRE, which is why we hang around.

The argument generally makes sense to me too . . . but paying off your home doesn't mean you're not also investing in the market.  I bought my home after I had been investing for seven years.  I didn't pull my investments out to buy the home, so I always could have tapped that money in case of need.  Is that really so unusual?

boarder42

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Re: Equity shaming
« Reply #94 on: August 04, 2018, 04:53:51 PM »
For those debating risk, the argument I see a lot from the no equity camp is this: let's say you pay your mortgage ahead or have a 15 year loan and build up a lot of equity. And then you lose your job. You cant tap that equity in your home bc nobody will refi or do a heloc for someone without a job. So you could lose your home despite all the equity you've built up. So you're better off investing the money and then if you lose your job you can tap stocks to pay your house payment until you have a job again. This rationale actually makes a ton of sense to me.
And another lightbulb goes off! Winner!

Ultimately, we are all free to make our own decisions. Some of us actually care about helping people make optimal choices on their path to FIRE, which is why we hang around.

The argument generally makes sense to me too . . . but paying off your home doesn't mean you're not also investing in the market.  I bought my home after I had been investing for seven years.  I didn't pull my investments out to buy the home, so I always could have tapped that money in case of need.  Is that really so unusual?

You still have less capital overall to support you regardless. And when doing both that's actually worse than choosing one or the other.  And you probably carried a larger ef b.c what you were doing was more risky. I think you're also Canadian so you guys don't have the same mortgage environment we do.

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Re: Equity shaming
« Reply #95 on: August 05, 2018, 06:51:22 AM »
For those debating risk, the argument I see a lot from the no equity camp is this: let's say you pay your mortgage ahead or have a 15 year loan and build up a lot of equity. And then you lose your job. You cant tap that equity in your home bc nobody will refi or do a heloc for someone without a job. So you could lose your home despite all the equity you've built up. So you're better off investing the money and then if you lose your job you can tap stocks to pay your house payment until you have a job again. This rationale actually makes a ton of sense to me.
And another lightbulb goes off! Winner!

Ultimately, we are all free to make our own decisions. Some of us actually care about helping people make optimal choices on their path to FIRE, which is why we hang around.

The argument generally makes sense to me too . . . but paying off your home doesn't mean you're not also investing in the market.  I bought my home after I had been investing for seven years.  I didn't pull my investments out to buy the home, so I always could have tapped that money in case of need.  Is that really so unusual?

You still have less capital overall to support you regardless. And when doing both that's actually worse than choosing one or the other.  And you probably carried a larger ef b.c what you were doing was more risky. I think you're also Canadian so you guys don't have the same mortgage environment we do.

Yep.
Totally different creature in Canada in terms of both mortgages and the rent vs buy equation.

However, I completely saw the light with your point that splitting money between investments and extra mortgage payments is actually the riskiest way to go. That was a HUGE lightbulb moment for me in terms of how to handle both my mortgage and my low interest student debt.
Intuitively, it seems so reasonable to focus on both, but it really is a terrifying increase of risk when you really look at it.

Also, in Canada, there's no tax deduction for mortgage interest unless it's used for investment. If in the future I'm still in an extremely high tax bracket and interest rates are still relatively low, then I will seriously consider a refi because the tax benefits alone would be substantial at a nearly 50% marginal tax rate.


Maenad

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Re: Equity shaming
« Reply #96 on: August 05, 2018, 07:53:12 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.

Retire-Canada

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Re: Equity shaming
« Reply #97 on: August 05, 2018, 08:00:44 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.

If you accept #3 is better than #1 & #2....then you have to accept that #4 is the same as #3.

Person A has $400K equity on a $1M home and the rest is mortgaged and they are investing any excess cash flow they earn. This is Option #3.

Person B has $800K equity on a $1M home and the rest is mortgaged and they are investing any excess cash flow. Then they decide to pull out $400K from the home and invest it leaving them with $400K equity on a $1M home. This is Option #4.

Ignoring the extra $400K Person B has invested and assuming their mortgage rates/payments are the same they look identical to each other right after Person B pulls out equity. So if you are okay with option #3 than you are okay with option #4.

ChpBstrd

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Re: Equity shaming
« Reply #98 on: August 05, 2018, 09:12:10 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.

SwordGuy

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Re: Equity shaming
« Reply #99 on: August 05, 2018, 09:44:37 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.