Author Topic: The opposite of paying off mortgage --> getting a bigger one?  (Read 1483 times)

CCCA

  • Pencil Stache
  • ****
  • Posts: 565
  • Location: Bay Area, California
  • born before the 80's
    • FI programming
Our household is probably a couple years from FIRE, though it depends on how markets go over the next couple of years.  Since we live in the Bay Area, housing costs are quite high for us.  We pay probably about $37k/yr on PITI.  There's this voice in my head that says if we pay off the mortgage, we can reduce our housing costs to around $13k/yr (we have high property taxes).  25k/yr translates into $625k less that we need in our 'stache.  However, I've read the mortgage payoff threads and know it doesn't make sense, since our mortgage rate is only 3.25%, and we make good use of the mortgage interest tax deduction.


It got me thinking though about going the other direction.  If we don't want to pay off the mortgage, what about taking on a bigger mortgage?  We could probably refinance and take out another 600-700k out.  Lets say we take out $500k.  At 4%, this would translate into another 32k/yr in mortgage payments.  We don't need the cash so all of it would just go to investments.  Given our plan to fire in a couple of years, our income in a couple of years will go way down and we should be able to pull out LT capital gains at 0% rate.  So the thing that we would need to is just average over 4% returns on our investments to break even with this plan.  Assuming we average 6+% we would be in great shape.  However on paper, it doesn't help as 25 x $32k = $800k, so adding $500k to our stache doesn't help us FIRE any sooner. 
[/size]Anyway, just wondering if anyone has thoughts about this plan. 
 


[size=78%]  [/size][/font]





[/size]
[/size] 
 

Rein1987

  • Stubble
  • **
  • Posts: 149
Re: The opposite of paying off mortgage --> getting a bigger one?
« Reply #1 on: March 18, 2016, 12:06:16 PM »
If you hit AMT, do not take more than 1M mortgage. The effective mortgage rate of 4% will be much lower than 4%.

However, it's hard to guarantee that your investment return will be better than your interest rate, especially in short terms. This can be a very risky move when your planned retirement date only a couple of years away.

tobitonic

  • Pencil Stache
  • ****
  • Posts: 549
Re: The opposite of paying off mortgage --> getting a bigger one?
« Reply #2 on: March 18, 2016, 06:35:09 PM »
This is actually the logical extension of the argument of all the math trolls who haunt the forums arguing day and night that it is foolish to pay off your mortgage a day early. If one outstanding mortgage is unequivocally better than one paid off in advance, it stands to reason that more mortgages would be even better; after all, you're paying below-market interest rates to acquire multiple properties while raking in the dough from investments, right?

Needless to say, I don't agree with the argument.