Author Topic: does anyone take the "pay off low interest debt slowly" advice to the extreme?  (Read 4588 times)

Nick_Miller

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Does anyone take out 30-40 year mortgages with the intent to keep housing costs fixed (and low) but with no real interest to ever pay off the mortgage?

EDITED TO ADD: If someone gave you a totally paid for house, and you were going to live in that house, would you take out a mortgage to invest the money in the market?

Do people continuously cash out the equity in their homes to invest? Like every 5-10 years, refinance to cash it all out (possibly keeping 20% equity to avoid PMI), and then rinse and repeat? Are there any limits to this approach?

If someone offered you a $1M 3.99% loan, would you automatically accept the loan to invest?

What about $10M?

I ask these questions because I think I am more conservative than most on here, and I'm curious to see where people draw the line when mathematical projections meet uncertainty/risk.



« Last Edit: July 25, 2016, 10:49:24 AM by Nick_Miller »

RWD

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Does anyone take out 30-40 year mortgages with the intent to keep housing costs fixed (and low) but with no real interest to ever pay off the mortgage?

Do people continuously cash out the equity in their homes to invest? Like every 5-10 years, refinance to cash it all out (possibly keeping 20% equity to avoid PMI), and then rinse and repeat? Are there any limits to this approach?

I took a 15 year mortgage for our house. I also lean on the more conservative side. But I don't plan on making extra payments to pay it down faster.


If someone offered you a $1M 3.99% loan, would you automatically accept the loan to invest?

Assuming a 30 year loan, there's about a 4.3% chance you would lose money (estimate from cFiresim using $57,216/year withdrawal to cover interest+principal, not inflation adjusted). I'd only take it if I could do another one each year (so that all my investment eggs aren't in the same starting year).

biglawinvestor

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If someone offered you a $1M 3.99% loan, would you automatically accept the loan to invest?

NO. Because investing on margin is dumb. I always rail against the "math" argument because it's way too simple and does not take into effect human behavior (like the fact that you WILL buy a bigger/more expensive house when you finance a purchase or, using your example, you WILL waste more money if you see $1M sitting in one of your accounts).

When people argue that they can make money off the spread, they're saying that logically it makes sense to finance everything. Why pay for a used car when you can finance it for 0.9% and invest the difference in the market? Why pay in cash for an iPhone when Apple will let you finance it at little to no interest and you can invest the difference in the market? Why purchase your sandwich when you can charge it to a credit card and make money off the float?

Because investing on margin is a recipe for increasing your anxiety. It can easily not work out if your debt becomes due and your investment is down. It sounds about as far away from "financial freedom" as you can be.

seattlecyclone

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If someone offered you a $1M 3.99% loan, would you automatically accept the loan to invest?

NO. Because investing on margin is dumb. I always rail against the "math" argument because it's way too simple and does not take into effect human behavior (like the fact that you WILL buy a bigger/more expensive house when you finance a purchase or, using your example, you WILL waste more money if you see $1M sitting in one of your accounts).

Perhaps you would waste money simply because you decided to shift your asset allocation from illiquid home equity to liquid stocks/bonds/etc., but rest assured that this blanket statement does not apply to all of us on this forum.

thd7t

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If someone offered you a $1M 3.99% loan, would you automatically accept the loan to invest?

NO. Because investing on margin is dumb. I always rail against the "math" argument because it's way too simple and does not take into effect human behavior (like the fact that you WILL buy a bigger/more expensive house when you finance a purchase or, using your example, you WILL waste more money if you see $1M sitting in one of your accounts).

When people argue that they can make money off the spread, they're saying that logically it makes sense to finance everything. Why pay for a used car when you can finance it for 0.9% and invest the difference in the market? Why pay in cash for an iPhone when Apple will let you finance it at little to no interest and you can invest the difference in the market? Why purchase your sandwich when you can charge it to a credit card and make money off the float?

Because investing on margin is a recipe for increasing your anxiety. It can easily not work out if your debt becomes due and your investment is down. It sounds about as far away from "financial freedom" as you can be.
It doesn't really make sense to make this argument in this venue. Many users in this forum are either analytical enough that they find greater comfort in optimization or have frugal habits strong enough to eschew typical overspending like you describe.

Taking your argumen t in the other direction, should you only buy a house with cash? Pay a mortgage before investing in retirement? Spend lots of money on insurance beyond your needs? Never invest your money?

MissNancyPryor

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Nick must be Dave Ramsey incognito.  Thanks for asking the questions this way, there is always so much hollering on the "should you pay off your house" threads that these types of questions have no room to be explored. 

I am not surprised to see them already dismissed by some as too remedial for this forum but I am hoping folks do chime in with actual answers. 

I hate debt so none of it works for me.  I am not sure what guaranteed return I would have to get to consider debt again but since stock returns are not close to that theoretical number and are far from guaranteed it isn't happening.   

Jack

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Does anyone take out 30-40 year mortgages with the intent to keep housing costs fixed (and low) but with no real interest to ever pay off the mortgage?

Yes.

EDITED TO ADD: If someone gave you a totally paid for house, and you were going to live in that house, would you take out a mortgage to invest the money in the market?

Yes. (Although I admit I'd be tempted to be irrational if the debt-free choice were also the default/inactive choice.)

Do people continuously cash out the equity in their homes to invest? Like every 5-10 years, refinance to cash it all out (possibly keeping 20% equity to avoid PMI), and then rinse and repeat? Are there any limits to this approach?

I haven't had a chance to do this yet (my loan terms won't allow cash-out for another four years).

If someone offered you a $1M 3.99% loan, would you automatically accept the loan to invest?

Depends on the loan terms, inflation, and CAPE. Also depends on my net worth/cash flow/ability to service the loan.

I like RWD's perspective on it.

When people argue that they can make money off the spread, they're saying that logically it makes sense to finance everything. Why pay for a used car when you can finance it for 0.9% and invest the difference in the market? Why pay in cash for an iPhone when Apple will let you finance it at little to no interest and you can invest the difference in the market? Why purchase your sandwich when you can charge it to a credit card and make money off the float?

Well, all things being equal, it does make more sense to finance! The key problem with your examples, however, is that all things are often not equal:

  • I'd be perfectly happy to finance a $10,000 car at 0.9%, if the alternative were paying cash for a $10,000 car. But it isn't -- the real alternative is paying cash for an older $5,000 car, which nobody will give you a 0.9% loan for, so I'll do that instead and save $5,000.
  • I'd be perfectly happy to finance a $600 iPhone, if I wanted an iPhone. But I don't -- I paid up front (sort of; see next point) for a $200 Nexus 5 instead.
  • I do charge sandwiches to credit cards and then pay the balance off when it comes due. I don't carry a balance from month to month unless the card has a 0%-interest-on-purchases offer going, which my cards currently do not. The nice thing about this is that if said sandwich is purchased from a vendor registered with Visa as a "restaurant" I get 3% back. Of course, buying a sandwich in the first place implies that I failed to buy ingredients and make it myself instead, so that's not ideal...

Fishindude

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I'd want a 15-20% return to go into debt like that, and that would require a business investment I was pretty comfortable with rather than the stock market.
Short answer .... No.     I'm probably done with debt for life, other than possible very short term line of credit type stuff.

Nick_Miller

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Nick must be Dave Ramsey incognito.  Thanks for asking the questions this way, there is always so much hollering on the "should you pay off your house" threads that these types of questions have no room to be explored. 

I am not surprised to see them already dismissed by some as too remedial for this forum but I am hoping folks do chime in with actual answers. 

I hate debt so none of it works for me.  I am not sure what guaranteed return I would have to get to consider debt again but since stock returns are not close to that theoretical number and are far from guaranteed it isn't happening.

That was very rude.

I can assure you I'm not Dave Ramsey (or even the atheist version of him). And as you can see by the responses, they certainly aren't "remedial." People disagree, to various extents.

I've been a bit disappointed by the rudeness of a few posters here. MMM seems extremely friendly, and I assumed the forum would have the same vibe.


CmFtns

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I think that you will find many people will say yes if asked if they leverage current low interest debt such as a mortgage to invest but when asked if they would accept new low interest debt at the same rate in order to invest then the answer changes to no.

This does not make logical sense

I think people can be scared of the "liability" a debt makes because you MUST make the payment EVERY month creating a constant required drain on your account.

-Could the payments for a 30 year $1 million loan at 4% be sustained with a $1 million investment? 
In all likelihood yes and you would be better off if you did it.

-Would I personally accept a loan like this in order to invest?
Maybe

To me it has to do with what would happen in a catastrophic loss situation. If you try to leverage a sum of money many times larger than your income/networth/investments than there is a very small change you could have your finances catastrophically devastated.

I choose to leverage a 3.875% mortgage right now and if I had an opportunity to leverage further debt at that rate I would... but I would not try to leverage millions of dollars like you suggested in the original post unless my income/net worth was much higher.

One problem is where do I get a loan with minimal setup fees at a low interest rate? The banks need a reason to lend you that type of money at that low interest rate and I don't think that reason will be "I want to invest it".

I think a good balance of risk for people (with self-discipline to invest the difference) is to not be scared of debt and to leverage their current low interest debt for profit but not seek further debt for the sole purpose of investment

Also if you haven't ready MMM view on this type of quesiton:
http://www.mrmoneymustache.com/2012/04/25/unlocking-your-home-equity-for-profitable-investments/
http://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/

« Last Edit: July 25, 2016, 01:51:30 PM by CmFtns »

bacchi

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Does anyone take out 30-40 year mortgages with the intent to keep housing costs fixed (and low) but with no real interest to ever pay off the mortgage?

Yes, if the closing costs and rates make sense.

Quote
EDITED TO ADD: If someone gave you a totally paid for house, and you were going to live in that house, would you take out a mortgage to invest the money in the market?

At <4% rates? Definitely.

Quote
Do people continuously cash out the equity in their homes to invest? Like every 5-10 years, refinance to cash it all out (possibly keeping 20% equity to avoid PMI), and then rinse and repeat? Are there any limits to this approach?

There is a limit of $100,000 for tax deduction purposes, which I've hit through 2 refinances. I may go into non-deductible territory soon with another re-fi to cash out more equity.

Quote
If someone offered you a $1M 3.99% loan, would you automatically accept the loan to invest?

Non-callable, fixed rate, over a 30 year life? Hell yeah.

Quote
What about $10M?

Yes.

I've also financed a car loan at 0.9% when banks paid more than that and used 0% offers at credit cards to float some money in a 12 month CD.


Money is fungible. Moving money from house equity to stock equity is just shuffling assets around.

MissNancyPryor

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Nick must be Dave Ramsey incognito.  Thanks for asking the questions this way, there is always so much hollering on the "should you pay off your house" threads that these types of questions have no room to be explored. 

I am not surprised to see them already dismissed by some as too remedial for this forum but I am hoping folks do chime in with actual answers. 

I hate debt so none of it works for me.  I am not sure what guaranteed return I would have to get to consider debt again but since stock returns are not close to that theoretical number and are far from guaranteed it isn't happening.

That was very rude.

I can assure you I'm not Dave Ramsey (or even the atheist version of him). And as you can see by the responses, they certainly aren't "remedial." People disagree, to various extents.

I've been a bit disappointed by the rudeness of a few posters here. MMM seems extremely friendly, and I assumed the forum would have the same vibe.

Actually, it was a compliment!!!   Swing and a miss for me I suppose. 

I thought you were clever to turn the question inside out to see it another way, as in taking on new debt to achieve the same results as just letting existing debt hang for the same purpose.  Must not care for Dave's message? He is really good at that turnaround thing which makes callers see the situation backward and identify the difference between math and the emotional toll of risk. 

Well, I  am not offended that you misunderstood, I really was offering praise and was bummed that early posters' replies were suggesting that the caliber of question wasn't up to par. 

MissNancyPryor

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I re-read my first post to see what the hell was rude and I think I see what was misunderstood. 

The phrase  "have no room to be explored" means they are hardly ALLOWED to be explored on those threads, I wasn't saying they shouldn't be.  On the contrary, this a great way to bring just that part of the discussion into the light.   

CmFtns

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I re-read my first post to see what the hell was rude and I think I see what was misunderstood. 

The phrase  "have no room to be explored" means they are hardly ALLOWED to be explored on those threads, I wasn't saying they shouldn't be.  On the contrary, this a great way to bring just that part of the discussion into the light.

I don't think there was anything wrong with your post... I initially read it exactly the way you intended and I'm sure when @nick_miller re-reads it he will see that as well.

Telecaster

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When people argue that they can make money off the spread, they're saying that logically it makes sense to finance everything. Why pay for a used car when you can finance it for 0.9% and invest the difference in the market? Why pay in cash for an iPhone when Apple will let you finance it at little to no interest and you can invest the difference in the market? Why purchase your sandwich when you can charge it to a credit card and make money off the float?

That's pretty much what I do.  In my case, the car loan was 1.9%.   That's close to the actual rate of inflation, so I got use of the money for pretty close to free. 

I can't think of a reason why I wouldn't take that same deal again. 

Rewdoalb

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I re-read my first post to see what the hell was rude and I think I see what was misunderstood. 

The phrase  "have no room to be explored" means they are hardly ALLOWED to be explored on those threads, I wasn't saying they shouldn't be.  On the contrary, this a great way to bring just that part of the discussion into the light.

I don't think there was anything wrong with your post... I initially read it exactly the way you intended and I'm sure when @nick_miller re-reads it he will see that as well.

Nothin wrong with some friendly clarification on both sides - good work! :)

I find this question a helpful thought exercise. While Ramsey would use this type of inverse question, it wouldn't be implemented to favor a setup that uses margin investments. Thus the MMM forums is a great place to pose this question, Nick.

johnny847

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I think that you will find many people will say yes if asked if they leverage current low interest debt such as a mortgage to invest but when asked if they would accept new low interest debt at the same rate in order to invest then the answer changes to no.

This does not make logical sense

I still agree that overall it's not logical but it's not as clear cut as you make it out to be.

In the first scenario there is a notion of lack of choice. Most people can't afford to buy a home without a loan. Now obviously nobody has to buy a home, but many people like the idea of owning a home and start their decision making process under the assumption that they will buy a home.
In the second scenario they don't have to take on debt to invest.

nereo

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Does anyone take out 30-40 year mortgages with the intent to keep housing costs fixed (and low) but with no real interest to ever pay off the mortgage?

Yes - my parents purchased their home in 1976 and have refinanced several times.  40 years later they have 15(ish) years left on their mortgage, and a dedicated mortgage 'sinking fund' that is worth significantly more than the entire value of their home.

EDITED TO ADD: If someone gave you a totally paid for house, and you were going to live in that house, would you take out a mortgage to invest the money in the market?

At today's rates I would - without hesitation.


MarciaB

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Does anyone take out 30-40 year mortgages with the intent to keep housing costs fixed (and low) but with no real interest to ever pay off the mortgage?


Can I just do a little rant here on the idea that somehow the financing cost of a house (the mortgage) is pretty much the cost of your housing? Because all the other costs of your house (taxes, insurance, repairs, replacements, landscaping...on and on and on) are not necessarily low and/or fixed at all.

OK, end of rant.

faramund

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Does anyone take out 30-40 year mortgages with the intent to keep housing costs fixed (and low) but with no real interest to ever pay off the mortgage?

Yes, if the closing costs and rates make sense.

Quote
EDITED TO ADD: If someone gave you a totally paid for house, and you were going to live in that house, would you take out a mortgage to invest the money in the market?

At <4% rates? Definitely.

Quote
Do people continuously cash out the equity in their homes to invest? Like every 5-10 years, refinance to cash it all out (possibly keeping 20% equity to avoid PMI), and then rinse and repeat? Are there any limits to this approach?

There is a limit of $100,000 for tax deduction purposes, which I've hit through 2 refinances. I may go into non-deductible territory soon with another re-fi to cash out more equity.

Quote
If someone offered you a $1M 3.99% loan, would you automatically accept the loan to invest?

Non-callable, fixed rate, over a 30 year life? Hell yeah.

Quote
What about $10M?

Yes.

I've also financed a car loan at 0.9% when banks paid more than that and used 0% offers at credit cards to float some money in a 12 month CD.


Money is fungible. Moving money from house equity to stock equity is just shuffling assets around.

Pretty much the same for me.. although 10M... I use  leverage with shares, but I always have a .. well, if things go bad, I could always work a few more years attitude, but I like to keep around 40% leveraged, i.e. if I have $100 in gross assets, that will be $40 debt, and $60 equity. So taking on 10M would completely blow out that ratio - so probably not.

Hotstreak

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I don't think it's valid to compare a mortgage loan at 3.99% to a $1MM or $10MM loan at 3.99%, as long as the 2nd loans wouldn't be secured by anything.  I would ABSOLUTELY take the unsecured loan.  No questions asked, today.  Worst case scenario (that 4-5% failure chance from FIRECalc referenced above) if the market goes to shit is that I file for BK and be done with it.  Since most retirement accounts and primary residence are protected in BK, I would be fine, might not even need to work again if I used my "free years" living on $10MM smartly. 


Whew!  I think I took your theoretical question a little literally, so there you have it.

Nick_Miller

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Nick must be Dave Ramsey incognito.  Thanks for asking the questions this way, there is always so much hollering on the "should you pay off your house" threads that these types of questions have no room to be explored. 

I am not surprised to see them already dismissed by some as too remedial for this forum but I am hoping folks do chime in with actual answers. 

I hate debt so none of it works for me.  I am not sure what guaranteed return I would have to get to consider debt again but since stock returns are not close to that theoretical number and are far from guaranteed it isn't happening.

That was very rude.

I can assure you I'm not Dave Ramsey (or even the atheist version of him). And as you can see by the responses, they certainly aren't "remedial." People disagree, to various extents.

I've been a bit disappointed by the rudeness of a few posters here. MMM seems extremely friendly, and I assumed the forum would have the same vibe.

Actually, it was a compliment!!!   Swing and a miss for me I suppose. 

I thought you were clever to turn the question inside out to see it another way, as in taking on new debt to achieve the same results as just letting existing debt hang for the same purpose.  Must not care for Dave's message? He is really good at that turnaround thing which makes callers see the situation backward and identify the difference between math and the emotional toll of risk. 

Well, I  am not offended that you misunderstood, I really was offering praise and was bummed that early posters' replies were suggesting that the caliber of question wasn't up to par.

I deeply apologize. I obviously misread your statement. Your response WAS clever now that I reread it. And to clarify to everyone, my questions were sincere...I honestly don't see where folks draw the line between risk and "what the math says." I'm not criticizing anyone who has a lower risk meter than do I.

MissNancyPryor

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We're good.  Glad you are here.   <fist bump>

Syonyk

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EDITED TO ADD: If someone gave you a totally paid for house, and you were going to live in that house, would you take out a mortgage to invest the money in the market?

*checks his paid-for house for a mortgage*  Nope!

Quote
If someone offered you a $1M 3.99% loan, would you automatically accept the loan to invest?

Nope.

Quote
What about $10M?

Nope.  Holy hell, nope right on out!

My wife & I value not having debt over a lot of other things.

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Altons Bobs

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No.  Not worth my time.