Author Topic: Take out mortgage to invest in index  (Read 590 times)

joenorm

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Take out mortgage to invest in index
« on: January 23, 2021, 07:50:22 AM »
I have seen this discussed here before but I'd like to revisit it.

I am not planning on doing this, but the concept is interesting and I wonder what others think.

Generally on this forum I notice two strong themes. 1)Nothing is guaranteed in real estate so don't count on anything(mainly referring to appreciation)
                                                                                   2)Index investing WILL as close to guarantee you returns as one can get(over enough time).

With this logic and low interest rates shouldn't everyone who can be pulling as much equity out of their property as possible and putting into index funds if they don't have something better to do with it? If you can pull $300K out at 2% why not put it in an index that is expected to make 8% gains over time? That's 6% right, not so bad.

Why is this a bad idea?


helloyou

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Re: Take out mortgage to invest in index
« Reply #1 on: January 23, 2021, 07:57:41 AM »
I think it's a good idea depending on your mortgage rate. But you need to have a fix rate for like 15 years at least.

waltworks

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Re: Take out mortgage to invest in index
« Reply #2 on: January 23, 2021, 09:27:51 AM »
I did it in the spring. With rates at ~3% and P/E at 18 or whatever it was, it was a no brainer. Took as much money as they'd give me (which wasn't much, to be fair - mortgage went from $250k to $360k) and dumped the excess into the market.

I wouldn't do it now, probably, just because stock prices are so insane, but you could make an argument for doing it anyway if your timeframe is 30 years, or alternately if you're worried about inflation.

-W

Malcat

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Re: Take out mortgage to invest in index
« Reply #3 on: January 23, 2021, 09:50:03 AM »
I have seen this discussed here before but I'd like to revisit it.

I am not planning on doing this, but the concept is interesting and I wonder what others think.

Generally on this forum I notice two strong themes. 1)Nothing is guaranteed in real estate so don't count on anything(mainly referring to appreciation)
                                                                                   2)Index investing WILL as close to guarantee you returns as one can get(over enough time).

With this logic and low interest rates shouldn't everyone who can be pulling as much equity out of their property as possible and putting into index funds if they don't have something better to do with it? If you can pull $300K out at 2% why not put it in an index that is expected to make 8% gains over time? That's 6% right, not so bad.

Why is this a bad idea?

Not exactly.
Our point is usually that if the overall market fails to rise over time, there will be much bigger issues to deal with, and a more conservative AA isn't going to solve them. So as long as one is depending on the financial world for their retirement, they need to assume that the markets will continue to rise.

There's no guarantee of that happening. We'll just all have much bigger concerns than our bonds and our real estate holdings at that point.

So why is it a bad idea?
It isn't.

Being over leveraged is a bad idea, but as long as you aren't over leveraged, it's a perfectly reasonable investment move, as long as it's legal in your jurisdiction.

cool7hand

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Re: Take out mortgage to invest in index
« Reply #4 on: January 23, 2021, 10:26:52 AM »
I think you mean using a home equity line of credit. I thought a mortgage was using the equity of a home to purchase it, while a line of credit may be used for other things, based on the rules of your jurisdiction.

Telecaster

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Re: Take out mortgage to invest in index
« Reply #5 on: January 23, 2021, 11:47:06 AM »
I think you mean using a home equity line of credit. I thought a mortgage was using the equity of a home to purchase it, while a line of credit may be used for other things, based on the rules of your jurisdiction.

I think they are talking about a cash-out refi.

Normally, I'm not really a fan, but I've got a ton of equity (like $600K) in the house and rates are super low right now.  Seems like those soldiers should be working for me.

Someone talk me out of this. 

joenorm

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Re: Take out mortgage to invest in index
« Reply #6 on: January 23, 2021, 11:49:31 AM »
I think you mean using a home equity line of credit. I thought a mortgage was using the equity of a home to purchase it, while a line of credit may be used for other things, based on the rules of your jurisdiction.

I think they are talking about a cash-out refi.

Normally, I'm not really a fan, but I've got a ton of equity (like $600K) in the house and rates are super low right now.  Seems like those soldiers should be working for me.

Someone talk me out of this.

Yes, Cash Out Refi is what I am referring to. Thanks. I'm in a similar, but little smaller boat.

MustacheAndaHalf

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Re: Take out mortgage to invest in index
« Reply #7 on: January 23, 2021, 10:29:40 PM »
I'll try to make the case against.  According to a Vanguard white paper years ago, the 10-year P/E ("CAPE-10") has a 0.43 correlation with future returns.  High P/E predicts low returns, low P/E predicts higher returns.  Currently, the CAPE-10 is higher than any point except the dot-com era.
http://fairwaywealth.com/wp-content/uploads/Vanguard-Research-11-30-2014.pdf#page=7
https://www.multpl.com/shiller-pe

Personally, I'm at 100% equities with a small margin loan, so I don't believe the case against.  In the 2020 crash, I pushed my equity allocation higher.  Looking at the time period after the dot-com crash, I see returns in the 1-2% range.  So even if we see another dot-com crash play out, it might mean 1% returns while paying 2% interest.  Over the long term, I think equities beat a fixed 2% mortgage rate.

But there's one caveat: someone who sells during a panic should not use leverage, regardless of the interest rate.  Selling after a 20-40% loss locks in that loss, and probably misses the recovery.  If anything, people prone to panic sell should have more bonds/cash in their portfolio, reflecting their lower risk tolerance.