Author Topic: Extend the mortgage and invest the difference?  (Read 6381 times)

rhv70

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Extend the mortgage and invest the difference?
« on: October 06, 2015, 09:29:52 AM »
What are others' thoughts on extending a mortgage to invest the extra money I'd have from lowering payments?

I've got 12 years left on a 15 at 2.875%.  I'm looking at a 25-year at 3.75%, which would cut off $670/mo.  I could invest this in an ETF that I've owned in the past that pays about 8.5% average.  It's a preferred income ETF (ticker PFO), uses 30% leverage, but mostly investment grade preferred stock.  I like this one because it's also somewhat tax advantaged.  About 50% of the income is taxed at dividend rates, not as interest income.

If things play out, getting 8.5% on my money rather than 2.875% could snowball into a bigger pot of savings, more quickly enabling ER.

I could also just dollar cost average into an index fund, but I pretty much use 401k money to do that.  This new money would be designated to be the money I would live on while when I retire and start a Roth conversion ladder.  I'd need 5 years of living expenses before I could touch the money that got converted to the Roth.

DaveR

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Re: Extend the mortgage and invest the difference?
« Reply #1 on: October 06, 2015, 10:58:06 AM »
If things play out, getting 8.5% on my money rather than 2.875%...

And there is the crux. PFO 12-mo return is 2.44%. How confident are you in that 8.5%? Paying off a mortgage is a guaranteed return.

k9

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Re: Extend the mortgage and invest the difference?
« Reply #2 on: October 06, 2015, 11:09:06 AM »
How do you know, on a time span of 12 years, you will get 8.5%, not 3%, not 1%, or even a negative return ? I can point a lot of 12-year periods when the markets did not return more than 2.875%. The more reasonable thing to do, when comparing the rate of a mortgage to investment rates, is to compare with treasuries for the period you are considering (here, 10 year treasuries should do the trick). If you think you can do better, then you are both taking risks and trying to beat the market, which is okay if you know what you do.

Well, here, 2.875% seems a rather low interest rate, however. I think investing the money rather than paying back the mortgage is not totally crazy.

Posthumane

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Re: Extend the mortgage and invest the difference?
« Reply #3 on: October 06, 2015, 11:26:40 AM »
An 8.5% return is not guaranteed, whereas your mortgage payoff is, so it depends on your risk tolerance. The chance of you getting better than 3.75% nominal after tax returns on your investment is pretty good even if you don't get the full 8.5% so from a pure numbers perspective you would be better off to extend your mortgage and invest. Many people don't like to have mortgage (or any debt) looming over their heads and would feel better paying it off even if it means slightly less than optimal returns.

nereo

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Re: Extend the mortgage and invest the difference?
« Reply #4 on: October 06, 2015, 11:40:02 AM »
to those suggesting that a mortgage of 2.875% (or 3.75%) is a guaranteed rate of return of 2.875% - you are ignoring/forgetting inflation. 
If we hit the fed's target inflation zone the real rate of return on this mortgage is < 1%.

There's no guarantee that the next 12 years will have a better return, but historically it's incredibly likely - real rate of returns after 10 years from -4% to +18% (median return 9.6%), and 10 year periods showed a positive return 88% of the time.  But you aren't limited to holding that money for 10/12 years either.  It's presumably going to be part of your stash for decades, where there are no historical periods which have shown a loss.
Will the future be worse than the past?

rhv70

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Re: Extend the mortgage and invest the difference?
« Reply #5 on: October 06, 2015, 11:52:37 AM »
The rate of return is definitely not guaranteed.  I've been thinking of doing this for a little while now, but haven't pulled the trigger partially because of that. 

The interesting thing about PFO is that the dividends are pretty well defined and didn't stop or even drop that much even in the depths of the financial crisis.  I've followed it for 10 years or so, owning it for most of that.  It pays .073 per month per share today.  At today's price that's a bit over 8.5% return paid to you in dividends, not an increase in share price.  Barring the financial meltdown of 2008-2009, the share price has remained between $10 and $13 a share, roughly.  The dividend does fluctuate somewhat based on the yield curve, and when it inverts, things get ugly but only for a time.  If I use this as money I'd need to live on 7 years from now and got caught in an inverted yield curve environment, my principal would be in rough shape, but the dividends should keep coming in, perhaps with a minor temporary reduction.  I'm guessing that would be maybe 10-15% but if somebody wants to fact-check me the dividend history is available for several years on sites like Yahoo finance.

There are several other leveraged bond or preferred stock funds that operate like this, but I'm familiar and comfortable with this one.

I guess this post boils down to "how reliable is a leveraged preferred stock or bond fund", since it seems like the concept of not paying off low-interest debt to instead invest in higher-rate investments seems wise - ignoring my human nature that dislikes debt in general.

K-ice

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Re: Extend the mortgage and invest the difference?
« Reply #6 on: October 06, 2015, 11:57:47 AM »
Do you mind if I change your focus and make your head spin with some "other" numbers?

I am considering something similar but looking at ~10 vs 25y. 
This has been debated every day around here but more with the premise to pay off fast vs slow.
Doubling down payments on a 25y mortgage would have it paid off in about 10y.
Mathematically, ignoring the risk, extending the mortgage and investing is the better solution.

It looks like you are comfortable investing, so that helps you lean towards that option.

My question, in looking at my own numbers, was "how much better?"

I have not looked at your particular interest rates (mine were the same in both cases).  But to really answer my question I also had to ask "How much other money do I have to invest?"

Spoiler! The more "other money" I had, the less of a difference the decision became 25y later.

Look at your entire budget and find out what your “other money” is to help answer the question.

My base Numbers
Mortgage $325K
Interest 3%
Payment on 25y $1537
Investment interest assumed 6% (Not guaranteed!)

Consider 4 scenarios:

1) Not a lot of "other" money (ie all you really have is the 25y mtg payment rounded up to the next $100, so $1600 in my case)
1a) Pay off MTG in 25y invest a little
1b) Pay off MTG as fast as possible, invest nothing then invest everything after 23y

2) Substantial "other" money (ie 2x the mtg payment or $3200 total to use every month)
2a) Pay off MTG in 25y invest a little + other money
2b) Pay off MTG as fast as possible, invest a little, then invest everything after 10.5y

RESULTS
Both (a) scenarios have more time for the investments to compound.
The investments I would have in the 1a case ($43K) are 38% greater than the 1b case ($26K)
The investments I would have in the 2a case ($1,152K) are 17% greater than the 2b ($959K) case
I ran it with $4800 total money (Dreaming!)
The investments I would have in the 3a case ($2.2M) are 8% greater than the 3b ($2.1M) case
At that point, 2.1M vs 2.2M, who really cares?

If you have little "other" money the % difference between 1a and 1b is larger and you are best to lengthen your mortgage.
If you have lots of "other" money the difference between 2a and 2b is not that big of a deal so just do what you are more comfortable with.
The other really important thing to see is that you should try to find that “other” money. Because Case 2a is a freaken million dollars, vs Case 1a is just $43 thousand.  Doubling your savings rate over those 25y, regardless of if you put it into the house or investments, will result in 25 to 35 times more money!!

Saving that “other” money is what makes rich Mustacians.


rhv70

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Re: Extend the mortgage and invest the difference?
« Reply #7 on: October 06, 2015, 12:19:38 PM »
@K-ice: apologies for repeating a frequent topic

I like the analysis you gave, though.  I would fall into the "little" other money category.  I pretty much fund the 401k fully, but am otherwise a bit house-poor in a 15-year.  I make decent money, wife is mostly home with the kids but picks up hospital shifts maybe 4 times/mo.  Our non-retirement cash savings rate is maybe a bit over 10% of gross, but more like 25-30% if you count principal reduction.  With 401k savings we're 40%?

@nereo: I also didn't factor in that the rate of return for mortgage interest is lower than the mortgage rate due to the tax savings.

brooklynguy

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Re: Extend the mortgage and invest the difference?
« Reply #8 on: October 06, 2015, 01:29:00 PM »
But you aren't limited to holding that money for 10/12 years either.  It's presumably going to be part of your stash for decades, where there are no historical periods which have shown a loss.

No, not if we're talking about a mortgage with 12 remaining years to maturity.  If you choose to invest in lieu of prepay, the time horizon for that investment is the weighted average life to maturity of the mortgage loan (not the multiple remaining decades you expect to continue to live), because the dollars you invest will have to be used to pay down the mortgage in accordance with its amortization schedule over the remaining years to final maturity (so they won't continue to be part of your stash beyond that point).

nereo

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Re: Extend the mortgage and invest the difference?
« Reply #9 on: October 06, 2015, 01:45:10 PM »
But you aren't limited to holding that money for 10/12 years either.  It's presumably going to be part of your stash for decades, where there are no historical periods which have shown a loss.

No, not if we're talking about a mortgage with 12 remaining years to maturity.  If you choose to invest in lieu of prepay, the time horizon for that investment is the weighted average life to maturity of the mortgage loan (not the multiple remaining decades you expect to continue to live), because the dollars you invest will have to be used to pay down the mortgage in accordance with its amortization schedule over the remaining years to final maturity (so they won't continue to be part of your stash beyond that point).

OP was thinking of refinancing to 25y, hence the comment.  Others stuck to the 12 year time frame - the purpose of my statement was to illustrate that the correct time frame for evaluation when considering a 25 year note is 25 years, not 12.
That's all i was sayin'

Trudie

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Re: Extend the mortgage and invest the difference?
« Reply #10 on: October 06, 2015, 02:04:11 PM »
I just created a "mortgage pay off sinking fund."  We kept our 15 year mortgage (3.25% interest) and I'm throwing all I can into Vanguard funds in the meantime.  My mortgage is around 122K.  My sinking fund is around 95K after the recent market hit.  I'll just keep accumulating in the fund and experiencing modest growth and paying off the mortgage (per schedule) in tandem.  Eventually the two numbers will meet and my mortgage will be "paid off" so to speak.  It seems simple, and it is.  After going into analysis paralysis over it a few years ago I chose this pragmatic approach.

This will happen around the time we FIRE, but I will not immediately go in and write a huge check to the bank.  We plan to relocate, so we'll sell the house then dump it all into equity and pay cash on our next (smaller) house.

For giggles I could put it on a graph in Excel, but I won't.

I like the flexibility of the approach.  I can continue to experience market gains but also have a mechanism for making mortgage payments if something catastrophic should happen.

nereo

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Re: Extend the mortgage and invest the difference?
« Reply #11 on: October 06, 2015, 03:23:30 PM »
I just created a "mortgage pay off sinking fund."  We kept our 15 year mortgage (3.25% interest) and I'm throwing all I can into Vanguard funds in the meantime.  My mortgage is around 122K.  My sinking fund is around 95K after the recent market hit.  I'll just keep accumulating in the fund and experiencing modest growth and paying off the mortgage (per schedule) in tandem.  Eventually the two numbers will meet and my mortgage will be "paid off" so to speak.  It seems simple, and it is.  After going into analysis paralysis over it a few years ago I chose this pragmatic approach.
Sounds similar to what my parents have done.  They've refinanced a few times, each taking advantage of even lower rates and now despite having lived in the same home for 35 years they still have about 10 years to go on a 15 year fixed mortgage at ~3.1%.  Their "sinking fund" has grown so large that the dividends alone basically could cover the mortgage, and they have absolutely no intention of paying it off, since it's become a giant wealth-generator for them.  They are retired.

bacchi

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Re: Extend the mortgage and invest the difference?
« Reply #12 on: October 06, 2015, 04:51:43 PM »
If you believe in the 4% rule (or 3.75% rule), a long-term re-fi is in the only sane choice.

If you decide to keep your current mortgage, overpaying is the equivalent to saving 35x your living expenses to be FI.

Create a sinking fund, as Trudie suggested, but don't buy PFO. Use a couch portfolio instead (VTI,VXUS,BND).

k9

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Re: Extend the mortgage and invest the difference?
« Reply #13 on: October 07, 2015, 09:04:22 AM »
to those suggesting that a mortgage of 2.875% (or 3.75%) is a guaranteed rate of return of 2.875% - you are ignoring/forgetting inflation. 
If we hit the fed's target inflation zone the real rate of return on this mortgage is < 1%.

There's no guarantee that the next 12 years will have a better return, but historically it's incredibly likely - real rate of returns after 10 years from -4% to +18% (median return 9.6%), and 10 year periods showed a positive return 88% of the time.
Sure, but that's already been priced by the market (if you believe markets are efficient), i.e when you buy assets today, you buy them at a price (and therefore, potential return) that takes into consideration the fact interest rates will probably go up, but maybe not.

Anyway, it's not an all-or-nothing decision. The OP can always pay back 50% of his debt and invest the remainder.

nereo

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Re: Extend the mortgage and invest the difference?
« Reply #14 on: October 07, 2015, 09:15:30 AM »
to those suggesting that a mortgage of 2.875% (or 3.75%) is a guaranteed rate of return of 2.875% - you are ignoring/forgetting inflation. 
If we hit the fed's target inflation zone the real rate of return on this mortgage is < 1%.

There's no guarantee that the next 12 years will have a better return, but historically it's incredibly likely - real rate of returns after 10 years from -4% to +18% (median return 9.6%), and 10 year periods showed a positive return 88% of the time.
Sure, but that's already been priced by the market (if you believe markets are efficient), i.e when you buy assets today, you buy them at a price (and therefore, potential return) that takes into consideration the fact interest rates will probably go up, but maybe not.

Anyway, it's not an all-or-nothing decision. The OP can always pay back 50% of his debt and invest the remainder.
No, the effects of future inflation have not been "priced by the market," which is what I was talking about.  Mortgages are an inflation hedge, and currently the FED has a congressional mandate to increase inflation.  Assuming we don't experience deflation (which I consider unlikely) a mortgage rate of ~3% will accrue interest very close to the rate of inflation.  When you take out a mortgage in 2015 dollars that's the amount you owe.  It doesn't get adjusted if inflation kicks back in.

Sure, the OP could choose a hybrid approach, but why would he/she?  Either real market returns over the next 25 years will exceed 2-3% or they won't.  To date we've never had a 25 year period where this hasn't happened.

k9

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Re: Extend the mortgage and invest the difference?
« Reply #15 on: October 07, 2015, 01:47:10 PM »
Ok, I read too fast, I hadn't seen the OP was talking about a 25 year horizon at 3.75%, not a 12 year at 2.875%.
No, the effects of future inflation have not been "priced by the market," which is what I was talking about.
According to efficient market hypothesis, it is. The market knows at least as much as you or me about future inflation, yet it has chosen to price 30 year treasuries (the closest you can compare a 25 year mortgage with) at a 2.89% yield. Despite a possible/likely future inflation.

Yet I have to admit returns on the US stock market have been historically higher, on any 25 year time period over the last century (AFAIK). There is no guarantee it will keep this way, but past results are all we have. Another advantage of stocks vs paying mortgage that is often overlooked : even if stocks are volatile and can be drowned for over a decade, at least you have an asset you can sell a part of in an emergency. Once you paid back your mortgage, you can't get the money back.

rhv70

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Re: Extend the mortgage and invest the difference?
« Reply #16 on: October 08, 2015, 09:32:53 AM »
If you believe in the 4% rule (or 3.75% rule), a long-term re-fi is in the only sane choice.

If you decide to keep your current mortgage, overpaying is the equivalent to saving 35x your living expenses to be FI.

Create a sinking fund, as Trudie suggested, but don't buy PFO. Use a couch portfolio instead (VTI,VXUS,BND).

Dunno, I like a fixed income instrument for a 7-year time horizon over an index.  Part of my reason for feeling this way is that stocks are still priced high today (www.yesyoucantimethemarket.com) - see the 15-year moving averages given there.  I realize I'd be dollar-cost averaging in, but everything I'd plow into an index right now is likely to have below-average returns.

nereo

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Re: Extend the mortgage and invest the difference?
« Reply #17 on: October 08, 2015, 10:40:30 AM »
If you believe in the 4% rule (or 3.75% rule), a long-term re-fi is in the only sane choice.

If you decide to keep your current mortgage, overpaying is the equivalent to saving 35x your living expenses to be FI.

Create a sinking fund, as Trudie suggested, but don't buy PFO. Use a couch portfolio instead (VTI,VXUS,BND).

Dunno, I like a fixed income instrument for a 7-year time horizon over an index.  Part of my reason for feeling this way is that stocks are still priced high today (www.yesyoucantimethemarket.com) - see the 15-year moving averages given there.  I realize I'd be dollar-cost averaging in, but everything I'd plow into an index right now is likely to have below-average returns.

Where are you getting 7 years from?  The question was about refinancing to a 25yr note.
Also, your analysis of stocks being picked is just that - your analysis.  There's plenty of people who will agree with you, and plenty that won't.

rhv70

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Re: Extend the mortgage and invest the difference?
« Reply #18 on: October 09, 2015, 01:51:55 PM »
If you believe in the 4% rule (or 3.75% rule), a long-term re-fi is in the only sane choice.

If you decide to keep your current mortgage, overpaying is the equivalent to saving 35x your living expenses to be FI.

Create a sinking fund, as Trudie suggested, but don't buy PFO. Use a couch portfolio instead (VTI,VXUS,BND).

Dunno, I like a fixed income instrument for a 7-year time horizon over an index.  Part of my reason for feeling this way is that stocks are still priced high today (www.yesyoucantimethemarket.com) - see the 15-year moving averages given there.  I realize I'd be dollar-cost averaging in, but everything I'd plow into an index right now is likely to have below-average returns.

Where are you getting 7 years from?  The question was about refinancing to a 25yr note.
Also, your analysis of stocks being picked is just that - your analysis.  There's plenty of people who will agree with you, and plenty that won't.

Ha, yes I pulled that 7 years from nowhere.  I neglected to mention that the absolute earliest I could consider retiring is 7 years.   

brooklynguy

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Re: Extend the mortgage and invest the difference?
« Reply #19 on: October 09, 2015, 02:09:12 PM »
I neglected to mention that the absolute earliest I could consider retiring is 7 years.

How is that relevant to the analysis?  If the choice is between prepaying your mortgage and investing, the relevant time horizon is the weighted average remaining life of the mortgage.

(What you said is equivalent to deciding to use a lump sum to pay off your mortgage in full because "you like a fixed income instrument over an index for a zero-year time horizon.")

rhv70

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Re: Extend the mortgage and invest the difference?
« Reply #20 on: October 09, 2015, 04:02:12 PM »
I neglected to mention that the absolute earliest I could consider retiring is 7 years.

How is that relevant to the analysis?  If the choice is between prepaying your mortgage and investing, the relevant time horizon is the weighted average remaining life of the mortgage.

(What you said is equivalent to deciding to use a lump sum to pay off your mortgage in full because "you like a fixed income instrument over an index for a zero-year time horizon.")

I'm obviously not a good communicator.  Let me try to restate my thoughts:

I am looking at trying to bring my potential retirement date earlier in time.  I ran some numbers and found that if I get 8.5% return (disregard how for now) and paid 3.75% on a 25-year (replacing my current 2.875% 15-year) I could boost my savings rate.  The number that I came up with was 7 years until early retirement.  I had previously been looking at 9 or 10.

My thoughts on a fund that is geared more towards fixed income is this alone: I believe it has a better chance of avoiding a precipitous drop than investing in an index like the S&P500.  That is a debatable point I grant you, but the point is that money would need to be there after 7 years.  I didn't bother explaining the significance of 7 years, but I realize that's somewhat important to the discussion.

My early retirement scheme would involve having 5 years of living expenses in after-tax accounts to start out.  I could potentially have that 7 years from now.   So 7 years from today I would then begin a Roth conversion ladder from rollover IRA money.  7 years + 5 years from today I'll be able to withdraw from that converted Roth pool without penalty - I would still be younger than 59 1/2. 

I hope that helps - I hate it when my posts are unclear.



sokoloff

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Re: Extend the mortgage and invest the difference?
« Reply #21 on: October 10, 2015, 02:52:56 PM »
I think where some people (myself included) are getting confused is why would you be getting so risk-averse with your money for a 7-year target date.

You respond because that's when you want to retire.

That still doesn't make sense to me, because you need your stash to last for your life, not your working life, so you're still investing (or should be, IMO) for a 40+ year time horizon, not to start playing defense in your 40s just so you can "break the tape" on some mythical figure that would allow you to RE.

You need to stay away from the extremely conservative side of investing, IMO. (or at least shouldn't be letting your FIRE date drive excessive conservatism)

rhv70

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Re: Extend the mortgage and invest the difference?
« Reply #22 on: October 12, 2015, 09:59:26 AM »
I think where some people (myself included) are getting confused is why would you be getting so risk-averse with your money for a 7-year target date.

You respond because that's when you want to retire.

That still doesn't make sense to me, because you need your stash to last for your life, not your working life, so you're still investing (or should be, IMO) for a 40+ year time horizon, not to start playing defense in your 40s just so you can "break the tape" on some mythical figure that would allow you to RE.

You need to stay away from the extremely conservative side of investing, IMO. (or at least shouldn't be letting your FIRE date drive excessive conservatism)

I definitely agree, there should be enough to last a lifetime.  I think part of the confusion is that I am really talking about two different stashes.  I'm hoping you followed my description of having the first 5 retirement years' living expenses covered by an after-tax account (the small stash I'm creating), and the establishing of a roth conversion ladder, coming from the rollover IRA account (the larger stash).  The large stash is invested in almost all equities, primarily the S&P500.  It is only the smaller that would be made up of, as you put it, conservative investments.  I would emphasize that while a leveraged bond or preferred stock fund is best categorized as fixed income, it's probably pretty far from what most financial advisors would consider conservative.  It's meant to emphasize predictable income, but there are still risks (e.g. the yield curve inverting as I mentioned earlier).  The reward for those risks is a much higher yield than is otherwise typical.

The only thing we're hashing over is how to invest the money right now that I'll need to  burn through in the first 5 years of retirement which could begin 7 years from now.  I'm here to learn, but it certainly seems to me that suggesting only the S&P500 index (or any other broad equity index) for money that I'll need in 7 years is something that can be debated.  I would argue that by most measures equities right now are priced for lower than average returns going forward.  In other words, putting money into an index fund today is not likely to earn you the historical 10-11% annual return.  If the S&P were 1600 or lower instead of 2000, I would much more readily agree with your position.


dess1313

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Re: Extend the mortgage and invest the difference?
« Reply #23 on: October 14, 2015, 12:37:01 AM »
I wouldn't trade the security of my house for risk like this. 

What if you have job loss or illness, now not only could the markets be down so the value of your money is less, your house is now in jeopardy as well.  and that is IF you get the returns you're suggesting.  That is a big IF.  Its a gamble whether you like to hear it described like that or not. 

nereo

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Re: Extend the mortgage and invest the difference?
« Reply #24 on: October 14, 2015, 09:46:50 AM »
I wouldn't trade the security of my house for risk like this. 

What if you have job loss or illness, now not only could the markets be down so the value of your money is less, your house is now in jeopardy as well.  and that is IF you get the returns you're suggesting.  That is a big IF.  Its a gamble whether you like to hear it described like that or not.
I have a hard time following this logic.  The OP isn't suggesting taking equity out of his/her home and spending it on hookers and blow, but rather putting it into an investment account.  In other words, transferring value from something that is incredibly illiquid, hyper-local and non-diverse (a house) to something that's easily transfered and has much greater diversity.  How is that more risky?

Let's take your scenario of a job loss or illness.  What will help the OP the most is having assets that an pay all the bills, including the mortgage.  If the OP pays off the home but then experiences a job loss or prolonged illness he/she will actually be in a much worse financial situation.  AT the interest rates we are discussing, the OP could withdraw 4% annually to cover the mortgage and still have an excess.

I also reject the notion that investing is gambling, particularly when the insinuation that home-ownership is somehow not a gamble (or at least less of a gamble).  As for the probabilities of earning returns, the best we have is historical data, and that is heavily in the investor's favor; no 20 year period has shown a real-adjusted loss and the average real-adjust return is around 8%.  Even looking at 5 year periods, 88% have shown positive returns. The same cannot be said for home ownership.

dess1313

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Re: Extend the mortgage and invest the difference?
« Reply #25 on: October 14, 2015, 05:27:24 PM »
I just find it such a strange notion.  You're risking the security of the house.  If you're ever fall behind on the mortgage you do risk the chance of foreclosure.    Housing costs without mortgage are so much easier to handle.  I have a secure job but illness had me off work for 5+ months and with a mortgage it was very difficult to make payments.  If i had no mortgage i would have had a much easier time.  My emergency fund would have lasted longer even.  housing value may or may not increase over time, but without mortgage payments/living expenses become much cheaper.  I only pay 1/3 now of what i used to do to keep a roof over my head.

brooklynguy

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Re: Extend the mortgage and invest the difference?
« Reply #26 on: October 15, 2015, 08:06:58 AM »
I just find it such a strange notion.  You're risking the security of the house.  If you're ever fall behind on the mortgage you do risk the chance of foreclosure.    Housing costs without mortgage are so much easier to handle.  I have a secure job but illness had me off work for 5+ months and with a mortgage it was very difficult to make payments.  If i had no mortgage i would have had a much easier time.  My emergency fund would have lasted longer even.  housing value may or may not increase over time, but without mortgage payments/living expenses become much cheaper.  I only pay 1/3 now of what i used to do to keep a roof over my head.

If you start going down the road of prepaying your mortgage and then lose your job midway through your mortgage prepayment plan, you will still need to make the same remaining mortgage payments under threat of losing your house (except you won't have the pile of investments that you would have had, had you been investing instead, which could have been tapped to help you make those remaining payments).

If you've already accumulated enough money to pay off your mortgage in full, you no longer have to worry about how you're going to service your remaining mortgage payments if you keep the mortgage, because the big pile of investments you purchase using that lump sum of money will be servicing those payments for you.

nereo

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Re: Extend the mortgage and invest the difference?
« Reply #27 on: October 15, 2015, 08:29:55 AM »
I just find it such a strange notion.  You're risking the security of the house.  If you're ever fall behind on the mortgage you do risk the chance of foreclosure.    Housing costs without mortgage are so much easier to handle.  I have a secure job but illness had me off work for 5+ months and with a mortgage it was very difficult to make payments.  If i had no mortgage i would have had a much easier time.  My emergency fund would have lasted longer even. 
brooklynguy has a good way of looking at it.
What I find important is that the choice isn't between having a mortgage and not having a mortgage.  Clearly if given that choice, I'd choose the later.  Instead, what the OP is deciding between is having a mortgage and a lot of extra investments or not having a mortgage but not having those investments.  That is key - the OP isn't planning on spending his money on hookers and blow, but to keep it invested.  Should there be a job loss or catastrophy there is still money there to cover everything from mortgage payments to food to medical expenses.  It becomes even more compelling given that the mortgage rate is less than 4%.

Another way to look at it is in terms of asset allocation.  If you choose to pre-pay your mortgage at the expense of savings, you will find that your net worth is heavily weighted on one asset - an asset that is illiquid, immobile, hyper-local, expensive and subject to market fluctuations.  If you choose to hold onto the mortgage or refinance and invest the difference, you are deciding to have more money in the market and less in your house.

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housing value may or may not increase over time, but without mortgage payments/living expenses become much cheaper.  I only pay 1/3 now of what i used to do to keep a roof over my head.

Again - what you are ignoring is all the money that you did not invest.  You've traded having money for not having a mortgage.  Your monthly expenses are certainly smaller, but so is your investment account.  Sure, once you have enough where you have 'won-the-game' and can trade money for a paid-off house and still have enough to remain FI that's great.  But until that point I would argue that you increase the risk by having so much wealth tied into something that is, on average, a very poor investment.