Author Topic: Taking out a new mortgage on a paid off house  (Read 1876 times)

HeadedWest2029

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Taking out a new mortgage on a paid off house
« on: July 20, 2020, 02:47:04 PM »
I have a paid off house, but I keep watching the price of 15 and 30 year fixed mortgage rates plummet.  15 yr fixed is 2.7%, 30 yr is 3.25%.  Isn't it logical to take out a mortgage and buy VTSAX?  What's the chances VTSAX can't get 3.25% return over 30 years (ok, it would have to be a little higher to cover mortgage transaction costs)?  I love being debt free, but I can't help but see that as a logical bet.

Dicey

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Re: Taking out a new mortgage on a paid off house
« Reply #1 on: July 20, 2020, 04:04:40 PM »
I have a paid off house, but I keep watching the price of 15 and 30 year fixed mortgage rates plummet.  15 yr fixed is 2.7%, 30 yr is 3.25%.  Isn't it logical to take out a mortgage and buy VTSAX?  What's the chances VTSAX can't get 3.25% return over 30 years (ok, it would have to be a little higher to cover mortgage transaction costs)?  I love being debt free, but I can't help but see that as a logical bet.
We ask ourselves this question All.The.Damn.Time. One thing you should know is that this type of loan is not as cheap as an acquisition loan. It's considered a Cash-out Re-Fi, and frequently costs a few basis points more. Why it does is a mystery, but it's a real thing.

Alternatepriorities

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Re: Taking out a new mortgage on a paid off house
« Reply #2 on: July 20, 2020, 04:40:21 PM »
How much would it have bothered you in April if you had done that in mid Feb? If you can honestly answer "meh, I knew it could go back up and I'm in it for the long haul" then it's probably a good plan. But, if you would have lost some sleep over that, it becomes a question of "is the lost sleep worth the extra coin"?

Now I'll go make some popcorn for this thread.

Dicey

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Re: Taking out a new mortgage on a paid off house
« Reply #3 on: July 20, 2020, 06:54:22 PM »
Mmmmm, popcorn!

LOL, a relative just sent us a box of popcorn from her neck of the woods as a thank you gift. Four flavors - Birthday Cake, Chocolate & Peanut Butter, Ranch, and Dill Pickle. I think I'm an air popped kind of plain popcorn eater, but at least my men ate 2/3 of each packet for with me and the packets were petite.

Off to get the trusty air popper down from the high cupboard...

Alternatepriorities

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Re: Taking out a new mortgage on a paid off house
« Reply #4 on: July 21, 2020, 12:35:29 AM »
I bought proper popper (silicon microwave bowl) this spring and a 50 lb bag of plain pop corn for $26... I think an air popper might make slightly better pop corn, but I'd have to try them side by side to be sure. The silicon one leaves very few kernels and is much less messy than stove top I used to make.

Dicey

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Re: Taking out a new mortgage on a paid off house
« Reply #5 on: July 21, 2020, 06:51:37 AM »
I bought proper popper (silicon microwave bowl) this spring and a 50 lb bag of plain pop corn for $26... I think an air popper might make slightly better pop corn, but I'd have to try them side by side to be sure. The silicon one leaves very few kernels and is much less messy than stove top I used to make.
I bought one of those for the RV we bought right before the lockdown, so I haven't used it yet. Looking forward to trying it out.

And now back to our regularly scheduled programming...

HeadedWest2029

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Re: Taking out a new mortgage on a paid off house
« Reply #6 on: July 21, 2020, 07:03:40 AM »
This thread definitely did not go where I expected...haha

Alternatepriorities

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Re: Taking out a new mortgage on a paid off house
« Reply #7 on: July 21, 2020, 02:02:57 PM »
To be fair Dicey and I did both offer thoughts on the question before derailing things with popcorn...

Further reflection on the topic and some thoughts others here have shared has shifted my perspective from "the math says never pay off my mortgage" to "I think I'd like to live mortgage free during the years when DW and I are both FIRE and we own property" The two primary draws for me are: 1) without a mortgage our spending is low enough that we wouldn't really need worry about tripping over any of the tax cliffs. 2) reduced sequence of returns risk paying off debt (even favorably priced debt) is a guaranteed ROI and nothing else really is.

HeadedWest2029

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Re: Taking out a new mortgage on a paid off house
« Reply #8 on: July 21, 2020, 02:46:46 PM »
Good point on the tax cliff.  It could definitely affect ACA subsidies if you have to harvest more gains to pay for the increased spending

The_Big_H

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Re: Taking out a new mortgage on a paid off house
« Reply #9 on: July 21, 2020, 10:51:32 PM »
I would NEVER put my house back on the block having paid off the death-pledge.

I find investing in the stock market to be risky enough as it is (the markets are perfectly capable of diving 40% and staying there, theres no rule saying they WILL go up 7% on average the next 30 years)

The last thing I want to do is make it riskier by investing on margin (even if low interest) and that margin is the roof over me and my families' head.

Having that paid off house means:
1) I need to realize/bring in very little income (either from a regular job pre-FIRE, part time semi-FIRE or truly R post-FIRE) to actually sustain my basic needs, which means I can play legal games to really reduce tax burden.  Since the mortgage is gone one can FAFSA hack when the time comes (money 'sheltered' in the form of 100% home equity and nicely sized retirement accounts).  One could get really creative if you say had a family of 4 and could live on $40k a year AGI MFJ from a part time work, you'll be in the money for some very subsidized Obamacare and EITC your tax rate might be negative!
2) In Florida especially, the house is a very well protected asset and about the only way it can be taken is if you don't pay the mortgage (none), property tax or the IRS (and its a lot easier to avoid that when you have no IRS tax bill because FIRE type income levels tend to be very low tax burdened, as Go Curry Cracker is somewhat famous for).
3) I only need to invest in tax advantaged buckets and don't really bother with a taxable account which you have to be careful with.  A $300,000 windfall would have to go there and now I could DQ myself from a lot of govt cheddar with that (say you accidently get $3601 in dividends... good bye EITC).  Im very fortunate to be able to MEGA ROTH backdoor at me current employer so I can FIRE in the timeframe I want investing solely in tax-advantaged spaces.  If I ever switched companies the mega roth backdoor option would be required before I jumped ship (imagine asking about THAT during salary negotiations or when your boss asks whats important to keeping you with the company).  5 years seasoning rule that money I backdoor in is just as accessible to me as a taxable account but tax free. 
4) if I or the SO drop dead tomorrow a paid off house and enough life insurance + 401k + roth for the surviving spouse to be able to live a decent frugal life as a single parent whose job is to raise the kids FT and not worry about the roof over our head.  It doesn't have to be death either... Job loss, illness, need to move... LIFE EVENTS like these happen and "the more you overthink the plumbing the easier it is to stop up the drain".


AdrianC

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Re: Taking out a new mortgage on a paid off house
« Reply #10 on: July 22, 2020, 12:35:48 PM »
I have a paid off house, but I keep watching the price of 15 and 30 year fixed mortgage rates plummet.  15 yr fixed is 2.7%, 30 yr is 3.25%.  Isn't it logical to take out a mortgage and buy VTSAX?  What's the chances VTSAX can't get 3.25% return over 30 years (ok, it would have to be a little higher to cover mortgage transaction costs)?  I love being debt free, but I can't help but see that as a logical bet.
I look at it as an asset allocation decision. I found that for a $3M portfolio and $300K house, a 60/40 stocks/bonds portfolio with a mortgage gave about the same result as a 70/30 portfolio with no mortgage. This was from 2008-2019.

If you're already 100% stocks, well only you know if you can take on even more volatility and sequence of returns risk.

With more than adequate liquidity, borrowing money at 3% and loaning it at 1% isn't my cup of tea. I'm FIRE'd at about 80/20 with no mortgage.

Fishindude

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Re: Taking out a new mortgage on a paid off house
« Reply #11 on: July 22, 2020, 01:19:46 PM »
I have a paid off house, but I keep watching the price of 15 and 30 year fixed mortgage rates plummet.  15 yr fixed is 2.7%, 30 yr is 3.25%.  Isn't it logical to take out a mortgage and buy VTSAX?  What's the chances VTSAX can't get 3.25% return over 30 years (ok, it would have to be a little higher to cover mortgage transaction costs)?  I love being debt free, but I can't help but see that as a logical bet.

Why not take everything that would be going to a mortgage payment and invest while staying debt free?
Invested money is always at risk of a loss.   Disregarding taxes and upkeep (which you will have mortgage or not) a paid off house is a guaranteed roof over your head. 

HeadedWest2029

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Re: Taking out a new mortgage on a paid off house
« Reply #12 on: July 22, 2020, 01:57:19 PM »
Why not take everything that would be going to a mortgage payment and invest while staying debt free?
Invested money is always at risk of a loss.   Disregarding taxes and upkeep (which you will have mortgage or not) a paid off house is a guaranteed roof over your head.

Correct - I've been mortgage free and investing the extra savings in the market for the last 10 years.  It's been great.
I agree investing in the stock market with the idea you would need the money in < 5 years is a bad idea, but if you stretch this over 30 years, there's literally no instance where you would have lost money at a 3-3.5% borrowing rate.  It would increase sequence of returns risk IF you don't have 5+ years of expenses saved in bonds and cash, but I have that too.  Perhaps this belongs in the investor heretic category.  I'm probably too risk-adverse to actually do it, but mortgage rates have never been this low.  If there was ever a time to deploy leverage for someone sufficiently covering their bases and has a 30 year timeline, now seems like a pretty good time.  FWIW, my stock & bond AA is 80/20, I'm FI but not RE, and also have real assets (farm land) for rental income...so sufficiently diversified.  This is definitely not a strategy for everyone, but there's got to be others at least considering this.  Some good points upthread though about getting bumped into a higher tax bracket and missing out on ACA subsidies.

https://fourpillarfreedom.com/wp-content/uploads/2018/11/sp500_1928_7.jpg

ERN had a pretty good post in 2017 when rates were 4%, which ultimately may be the best answer based on the CAPE
"According to this table, no mortgage and an 80/20 portfolio would have done the best if targeting a failsafe withdrawal amount and all other failure probabilities up to 10%."
https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/


« Last Edit: July 22, 2020, 02:10:24 PM by HeadedWest2029 »

SeattleCPA

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Re: Taking out a new mortgage on a paid off house
« Reply #13 on: July 23, 2020, 09:57:19 AM »
I have a paid off house, but I keep watching the price of 15 and 30 year fixed mortgage rates plummet.  15 yr fixed is 2.7%, 30 yr is 3.25%.  Isn't it logical to take out a mortgage and buy VTSAX?  What's the chances VTSAX can't get 3.25% return over 30 years (ok, it would have to be a little higher to cover mortgage transaction costs)?  I love being debt free, but I can't help but see that as a logical bet.

Maybe missed this, but just in case... the mortgage interest won't be a federal income tax deduction in this case... Probably you know that. But in effect, the mortgage interest rate will be akin to a tax-free muni bond rate ...

Frugal Lizard

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Re: Taking out a new mortgage on a paid off house
« Reply #14 on: July 23, 2020, 10:21:39 AM »
We are sort of contemplating something like this when we have to renew in November.  We could be debt free if we pay off the remaining amount (30-35K) with some of the cash we have on hand because we are too chicken to buy stuff right now or we could just renew for the remaining balance and continue at our current savings rate or we could borrow more and completely top up all the room in our RSP's and TFSA's to make up for those years when we had very little income and no ability to save.  The tax advantages now that DH has a very high income are appealing but we haven't fully run the numbers yet.  We are living more frugally so our savings rate is way higher but we are so behind from 10 years of really low income and five years before of living the high life on a single income.  We are also scared investors so we have been really slow to buy ETF's.  I also have a predisposition to abhor debt.  (our first mortgage was a great rate of 5.95%)

Not sure how to make this decision so I am going to follow along on this thread and pick up any applicable to the Canadian tax rules. 

Dicey

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Re: Taking out a new mortgage on a paid off house
« Reply #15 on: February 01, 2021, 12:19:40 PM »
Well, @HeadedWest2029, what did you decide?

HeadedWest2029

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Re: Taking out a new mortgage on a paid off house
« Reply #16 on: February 01, 2021, 12:28:12 PM »
Somewhat inspired by the latest MMM post, I'm using margin debt from my brokerages.  I know it's not the same thing, but at least I'm taking advantage of low borrowing rates a little.
No refi cost and it took all of 5 minutes.  Obviously doing it as a small % of the brokerage balance, invested in something uncorrelated to the market, and will / can pay off the debt if rates change.  But yeah, locking in the rate for 30 years you can use a lot of leverage and space out the risk.  If the stock market can't beat 2.5% over 30 years we're all boned.
« Last Edit: February 01, 2021, 12:35:42 PM by HeadedWest2029 »

ChpBstrd

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Re: Taking out a new mortgage on a paid off house
« Reply #17 on: February 01, 2021, 09:06:07 PM »
The issue is that if interest rates rise, that would increase the discount rate applied to stocks, bonds, and real estate. So everything would go down at the same time as the margin interest rate goes up.

HeadedWest2029

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Re: Taking out a new mortgage on a paid off house
« Reply #18 on: February 02, 2021, 08:50:12 AM »
Yes. A definite advantage to locking in the mortgage rates.  Without getting into my particular investments, I'm currently borrowing on margin at 2.5% and earning 8.6% on the other side (not related to the stock market).  If the 2.5% goes up or the 8.6% goes down, I have liquidity on both sides to pay off the margin.  But fully in support of the original idea on this post.  I still think it makes absolute sense

waltworks

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Re: Taking out a new mortgage on a paid off house
« Reply #19 on: February 02, 2021, 09:38:10 AM »
I took out as much money as they'd give me this past spring at 3.125% and dumped it in the market.

-W

Alternatepriorities

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Re: Taking out a new mortgage on a paid off house
« Reply #20 on: February 02, 2021, 10:40:39 AM »
I took out as much money as they'd give me this past spring at 3.125% and dumped it in the market.

-W

That's probably worked out pretty well for you...

waltworks

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Re: Taking out a new mortgage on a paid off house
« Reply #21 on: February 02, 2021, 12:07:35 PM »
I took out as much money as they'd give me this past spring at 3.125% and dumped it in the market.

-W

That's probably worked out pretty well for you...

It did. I'm not a P/E diehard but ~20 or lower means (to me) go nuts and buy as much as you can.

Too bad I'm too lazy to make much money and the mortgage folks would only give me $160k.

-W

ColoAndy

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Re: Taking out a new mortgage on a paid off house
« Reply #22 on: February 05, 2021, 08:21:46 AM »
I definitely see the temptation but would not do this personally.

Dicey

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Re: Taking out a new mortgage on a paid off house
« Reply #23 on: February 05, 2021, 09:22:50 AM »
I definitely see the temptation but would not do this personally.
If your net worth was as high as Walt's is, you'd feel a lot more confident about doing this. He could kill that debt in a heartbeat if he needed or ever wanted to. Resources like that give a person a lot more options and confidence. In his position, this merely a strategic move. We know he is at zero risk of spending it on stupid shit.

The real risk is when someone with insufficient resources does this and lets it start burning a hole in their pocket. That's not Walt. A more interesting question might be if that's something you fear might happen to you? Would you be tempted to spend it? Would you be fearful and pull out if the stock market tanked after you'd dumped the money in? Or would you have the wherewithal to ride it out?

ChpBstrd

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Re: Taking out a new mortgage on a paid off house
« Reply #24 on: February 05, 2021, 09:35:34 AM »
I definitely see the temptation but would not do this personally.
If your net worth was as high as Walt's is, you'd feel a lot more confident about doing this. He could kill that debt in a heartbeat if he needed or ever wanted to. Resources like that give a person a lot more options and confidence. In his position, this merely a strategic move. We know he is at zero risk of spending it on stupid shit.

The real risk is when someone with insufficient resources does this and lets it start burning a hole in their pocket. That's not Walt. A more interesting question might be if that's something you fear might happen to you? Would you be tempted to spend it? Would you be fearful and pull out if the stock market tanked after you'd dumped the money in? Or would you have the wherewithal to ride it out?

And as I noted earlier, a rising interest rate would demolish asset values and raise interest rates at the same time. Any whiff of inflation would shake out a lot of leveraged holders of stocks and bonds, even if it proves to be a false alarm.

I think interest rates will stay low just like they did from 2010-on, but I'm not so certain about this forecast that I would make a leveraged YOLO bet. Today's market valuations have converted usual and normal buy and hold investments into YOLO bets on continued low inflation.

The issue is that if interest rates rise, that would increase the discount rate applied to stocks, bonds, and real estate. So everything would go down at the same time as the margin interest rate goes up.

waltworks

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Re: Taking out a new mortgage on a paid off house
« Reply #25 on: February 05, 2021, 12:14:12 PM »
I definitely see the temptation but would not do this personally.
If your net worth was as high as Walt's is, you'd feel a lot more confident about doing this. He could kill that debt in a heartbeat if he needed or ever wanted to. Resources like that give a person a lot more options and confidence. In his position, this merely a strategic move. We know he is at zero risk of spending it on stupid shit.

The real risk is when someone with insufficient resources does this and lets it start burning a hole in their pocket. That's not Walt. A more interesting question might be if that's something you fear might happen to you? Would you be tempted to spend it? Would you be fearful and pull out if the stock market tanked after you'd dumped the money in? Or would you have the wherewithal to ride it out?

To be fair, our NW is not *that* high. But our lifestyle expectations/material needs are ridiculously low/flexible so we could easily live on 1/2 or less of what we do (if we moved somewhere cheap we could live on 1/3), and that means that it's easy to bet on yourself in the long run/trade short term risk for long term rewards.

I also did it when rates were low AND stock prices were... at least not crazy high. It seemed silly to pass it up. I'm not sure I would do it today with P/E double what it was in the spring.

-W