What would you do with money borrowed at 3.25%?

[ChpBstrd]

We're refinancing our mortgage, and the loan officer called to let us know our house appraised for a few thousand more than expected. Therefore we could either (a) only refi the outstanding balance on our current mortgage, or (b) refi for a few thousand dollars more than our existing mortgage.

Of course, your typical consumer-sucka would borrow the extra cash and spend it on vacations, luxury items, or home improvements. We opted not to borrow the money because we didn't need to borrow it and couldn't think of productive applications for it. Yet I wonder if I missed an arbitrage opportunity. I would probably not regret putting the money in the market for 5-10 years, but it's still possible. Then again, the extra debt and higher payments would potentially slow our transition to FIRE.

So where would you safely invest a few thousand dollars borrowed for 15 years at 3.25%?

[DeniseNJ]

Hmmm.  I assume many of the Don't Pay Off Your Mortgage crowd would say take the extra cash and start investing into the market.  But I wonder how many of them are taking out HELOCs or refi-ing their homes to invest in the predicted downturn--if there is a downturn which there may be.

It would mean a higher monthly payment.  Could you afford it?  Could you stay with your current payment and pay the difference to DCA into the market?  How close are you to FIRE?  Is your FIRE budget based on a paid off house?  Maybe you should take a 30 year and pay the monthly savings into the market?  You could use your profits to pay off the house in full when you FIRE.

Lots to think about and not just for ppl on the verge of a refi.  Anyone who owns property they could leverage or who has a low interst loan or who can take out a low interest loan has a lot to think about if we do have a down turn.  Basically, should someone, given their particular circumstances, interest rates, monthly cash flow, etc., borrow money to buy stocks?

[CorpRaider]

You max out tax advantaged accounts already, right?

[RWD]

Investment Order

I would throw it on the pile according to the asset allocation specified in my investment policy statement.

[PDXTabs]

To me, that would depend on how worried you are about making the mortgage payments. If there is no doubt in your mind that you will always be able to pay your mortgage (even if the home is upside down) I would borrow it and put it into stock market index fund(s). But if you couldn't weather a 35% drop in home price, I'd leave it in equity.

[ChpBstrd]

You max out tax advantaged accounts already, right?

Yes. Maximum IRA and 401k contributions. Anything earned with the borrowed money would be taxable, but the  mortgage interest would not be deductible because we won’t be itemizing.

[dandarc]

Hmmm.  I assume many of the Don't Pay Off Your Mortgage crowd would say take the extra cash and start investing into the market.  But I wonder how many of them are taking out HELOCs or refi-ing their homes to invest in the predicted downturn--if there is a downturn which there may be.

I am one of them doing just this. Due to a quirk with our situation (moving back into a rental) we're waiting until October, but this is exactly what we're going to do with the proceeds. May the top for the next several months already be in!

[ChpBstrd]

To answer some more questions above,

We can easily make the payments (spending 10-15% of income on housing) and could get by if one of us permanently left the workforce, although we would not be able to save much in that scenario.

We are 64% along our journey to FIRE as of today. I estimate we could RE in 5-6 years if investments earn about 6% between now and then. If inflation and interest rates remain low 5-6 years from now, the plan would be to pay off the mortgage to reduce SORR. Otherwise, such as if the future is an environment where A grade bonds are paying, say, 5% we will probably hold the mortgage.

(Our refi expenses are yielding a double digit risk-free ROI even if we pay off in 5 years, so spending the money on the refi was a no-brainer!)

[Proud Foot]

In my case I would use the difference to pay down some other debts. Otherwise I would add it to my investments. For a 15 year at those rates your monthly payment would only increase approximately $7 for every additional $1,000 you take out. In my opinion it would be worth it.

[A Fella from Stella]

In my case I would use the difference to pay down some other debts. Otherwise I would add it to my investments. For a 15 year at those rates your monthly payment would only increase approximately $7 for every additional $1,000 you take out. In my opinion it would be worth it.

I'm in the same boat. In my case I have a CC with a $25,000 balance, so would pay that off.

[Classical_Liberal]

IMO there is a massive difference between choosing to not pay off an existing mortgage and cashing out out my homes equity to purposely leverage for investing purposes. Maybe it's just a mental thing, but I'd never do it.

A tangentially-related side note, I've been seeing more and more posts like this lately, ie should I buy stock on leverage, because I have an opportunity to borrow at [insert low rate here].  Reading too much of this kind of thinking from a forum where I believe intelligence and investing skill is well above average is scary to me from a macro economic perspective.  How much of the equity market is owned by debt?

[vand]

A tangentially-related side note, I've been seeing more and more posts like this lately, ie should I buy stock on leverage, because I have an opportunity to borrow at [insert low rate here].  Reading too much of this kind of thinking from a forum where I believe intelligence and investing skill is well above average is scary to me from a macro economic perspective.  How much of the equity market is owned by debt?

Here you go:

https://www.advisorperspectives.com/dshort/updates/2019/07/22/margin-debt-and-the-market-up-4-8-in-june

[Classical_Liberal]

@vand

Right, as horrible as it looks, that's ONLY margin debt.  What about people like OP?

[RWTL]

I'd give the money back to the bank.

Precursors to The Great Depression:

People bought stocks with easy credit.
During the 1920s, there was a rapid growth in bank credit and easily acquired loans. People encouraged by the market’s stability were unafraid of debt.

The concept of “buying on margin” allowed ordinary people with little financial acumen to borrow money from their stockbroker and put down as little as 10 percent of the share value.

Source: https://www.history.com/news/what-caused-the-stock-market-crash-of-1929

[harvestbook]

If I wanted to FIRE, I'd want less debt, not more.

[PDXTabs]

IMO there is a massive difference between choosing to not pay off an existing mortgage and cashing out out my homes equity to purposely leverage for investing purposes. Maybe it's just a mental thing, but I'd never do it.

I'm 100% okay with paying off your mortgage as a hedge. I'm also 100% okay with people taking cash out to invest. It all depends on your risk tolerance.

The professional real estate investors that I know in real life prefer 2:1 debt:equity on their investment properties after years of practice with different ratios.

[nereo]

I'd give the money back to the bank.

This is not 'buying on margin'

If I wanted to FIRE, I'd want less debt, not more.

The amount of debt is irrelevant to be FIRE.  What matters is the ratio of expenses to investments.  Debt only plays into it by increasing your expenses - but it does so by also increasing your investments.

If you are planning on using a 4% WR strategy (or even a super-conservative 3.5% WR) it's a no brainer to invest money at 3.25%

[ChpBstrd]

Interactive Brokers has even better rates for borrowing on margin. The benefit of a cash out refi is having no risk of a margin call. Margin calls are what makes leveraged investing so dangerous.

For each extra $1,000 I borrow at 3.25% for 15 years, my payments would increase by about $7/month or $84/year.

Applying the 4% rule to $84 in expenses, I would technically need an extra 84*25=$2,100 to retire for each $1,000 I have on loan at the time of retirement. Presumably I could just prepay the money back into the mortgage at the time of retirement, but this would only change the loan’s duration, not the payments, unless I did some sort of recast. This is the downside of home equity investing.

Assuming I pay off the mortgage upon FIRE in 5y, what matters is could I earn more than 3.25% per year over those 5 years with the additional requirement of safety I need for borrowed money? (Maybe having a different risk tolerance for borrowed money than I have for owned money is irrational, but borrowed money definitely has more strings attached and increases SORR more than owned money.)

My best idea for the funds would be to apply them as a down payment on a rental property. My math shows an ROI on the down payment of about 5% on the deals near me. Not exactly a life changing spread there.

[effigy98]

I would pay it back and then get a loan in a year that pays me .5% to get. Then I would buy a fleet of used tesla's, I would then turn on the auto taxi feature and let them roam around the city and collect money.

[nereo]

I would pay it back and then get a loan in a year that pays me .5% to get. Then I would buy a fleet of used tesla's, I would then turn on the auto taxi feature and let them roam around the city and collect money.

Quoting for posterity. 
Let me know how that turns out.

[effigy98]

In all seriousness Solar has been a great asset for me. I use the excess energy for mining bitcoin, then use the bitcoin profit to buy more solar. I also get a dividend check back from the government for each watt I produce (even when I consume it! Insane). You can also setup an indoor garden like micro greens which do well profit wise, but it is more work then bitcoin.

[ChpBstrd]

In all seriousness Solar has been a great asset for me. I use the excess energy for mining bitcoin, then use the bitcoin profit to buy more solar. I also get a dividend check back from the government for each watt I produce (even when I consume it! Insane). You can also setup an indoor garden like micro greens which do well profit wise, but it is more work then bitcoin.

A similar investment choice would be to spend the money insulating the shit out of your house. The ROI is almost certainly greater than 3.25% and it offsets spending in real time, so it doesn’t mess up FIRE calculations.

[nereo]

A similar investment choice would be to spend the money insulating the shit out of your house. The ROI is almost certainly greater than 3.25% and it offsets spending in real time, so it doesn’t mess up FIRE calculations.

Hey, you've literally hit on our current strategy!  new home, lots of low-hanging fruit... given the energy budget of the previous owners we're pretty sure we can recoup $4k in insulation costs in under 3 years.