Author Topic: Emotions about mortgage...  (Read 4764 times)

RecoveringCarClown

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Emotions about mortgage...
« on: February 09, 2015, 05:12:42 PM »
Here is the situation.

The current mortgage is for 3.5% with $287K left.

If you had the opportunity to pull out $150k equity with a zero dollar refi still at 3.5%, would you do it??

My first thought is no, because I would need a guaranteed 3.5% return on that $150k.

However, if I reverse it and had $437k left on the loan and $150k cash, I am also reluctant to 'dump' all that money into the house.

I find this disturbing, they are both the exact seem thing, but they 'feel' different to me when I know they should not.

Questions: 

1. Do others feel this way as well (money in the hand vs money sunk into mortgage)?
2. What would you do in either case?

marblejane

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Re: Emotions about mortgage...
« Reply #1 on: February 09, 2015, 05:16:35 PM »
What is the house worth? Your home equity in either case is an important factor.

RecoveringCarClown

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Re: Emotions about mortgage...
« Reply #2 on: February 09, 2015, 05:20:50 PM »
This is intriguing, I purposely left this out, why is the home worth important? 

If it is worth $500k or $1M or $2M, what is the difference? 

Let's just assume no PMI in any case.

Rezdent

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Re: Emotions about mortgage...
« Reply #3 on: February 09, 2015, 05:39:29 PM »
They don't fell the same to me.
Pulling equity will result in higher liability and also risk.  Whether you make profit or not, you owe the money.
Pushing cash into the house assumes you have the money in hand - then the question becomes what is the best use of the money, and it probably could be put to better use.

For me, I would not pull equity just because I could, or because the rate is low.  I might do it to leverage another purchase though - but I would have a clearly defined plan first.  My risk tolerance is lower than other people.  I'm also older and have less time to recover downturns.  YMMV.

SaintM

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Re: Emotions about mortgage...
« Reply #4 on: February 09, 2015, 07:15:39 PM »
Can you afford the higher loan amount on your current income? If yes, you might consider using the proceeds to buy a rental property, stock, or mix of both.

RecoveringCarClown

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Re: Emotions about mortgage...
« Reply #5 on: February 09, 2015, 09:38:06 PM »
They don't fell the same to me.
Pulling equity will result in higher liability and also risk.  Whether you make profit or not, you owe the money.
Pushing cash into the house assumes you have the money in hand - then the question becomes what is the best use of the money, and it probably could be put to better use.

For me, I would not pull equity just because I could, or because the rate is low.  I might do it to leverage another purchase though - but I would have a clearly defined plan first.  My risk tolerance is lower than other people.  I'm also older and have less time to recover downturns.  YMMV.

I think you perfectly restated my point, why don't they feel the same?

Why would you be willing to invest money you have in your pocket vs money that you could pull from your house at zero cost?

Why would you invest money that you could use to pay down your mortgage?

On a 5 year horizon, where would you invest?

Also rental properties do not work where I live on the 2% rule, heck even 1% is a problem.

ninjaneer

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Re: Emotions about mortgage...
« Reply #6 on: February 10, 2015, 11:34:37 AM »
The way I would look at it is how far you are progessing toward multiple goals.  One goal is to pay off the mortgage, another is to have investments worth X, etc.  If you are "undoing" your progress on one goal (i.e. pulling equity out of your house), it's going to be more painful because you've invested yourself in getting to this point.

You asking this question has been a little helpful for me, too, because I am in a similar boat.  But rather than equity, I'm thinking about cash flow.  I've got a 15 year mortgage right now, because when I bought my house a year ago I was thinking that I would want to be mortgage free at 50. But as I watch my principal go down by a substantial chunk each month, I'm wondering if I should have gotten a 30 year mortgage and invested the difference.

The "shockingly simple math" says to add principal repayment as part of your savings rate, right?  But that is half of what I'm saving right now and it's only earning me 3.5% versus the other half that is going into 401k...  Anyway, I still haven't figured out how I feel about the different options.  Whether I'm happier with the security of the mortgage being paid off sooner or whether I'm not going to have enough 'stashed because I missed out on market compounding.  That said, once I know where I want to be in the future, I can work back to determine what I should be doing now.  And I think that's what you want to do, too.  You shouldn't "undo" too much of your mortgage paydown that you don't feel secure enough as you approach ER.

Maybe this was too much of a ramble to be any help, but I thank you because it's helping me work through similar issues.

Turkey Leg

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Re: Emotions about mortgage...
« Reply #7 on: February 10, 2015, 11:46:36 AM »
On a 5 year horizon, where would you invest?

My mortgage payoff fund (which I need in a bit less than three years) is in a municipal bond fund. This fund is only available at my place of work (so it's a private fund), but I believe Vanguard might have one of those as well. The municipal bond fund is nearly 100% federal tax free, a side benefit.

Do the mustachians think that is a good strategy? Or is there a better one?