I've been having a discussion on the "not paying off mortgage early" thread, but didn't want to derail it so I'm creating a new one. My general theory is that there is nothing unique about mortgages, and we should be using any cheap loans we can get in order to invest extra money. I've been using 0% APR credit cards and balance transfers, which can let you use a banks money for 4+ years before needing to pay much of anything. Here is the quoted discussion below:
ME:
Does the fact that it's mortgage debt change anything, or is the rate all that matters? For example, should any debt under 3% not be paid off past the minimum payments? 4%?
No most debts under 5.5% should not be paid off currently see below. and if you havent maxed tax advantaged space dont pay off debts under 7.5%
Current 10-year Treasury note yield is ~2.5%. See
http://quotes.wsj.com/bond/BX/TMUBMUSD10Y
It is just about the gap in the difference between investment returns and mortgage rates. Whether you itemize on your tax return or not may also impact the size of your gap where it matters.
ARS had a good thread. If I recall, within 2%, it is up to you what you choose, more than 2% gap (mortgage lower) and you definitely want to stay invested versus paying off mortgage, unless you have other non-monetary reasons in play.
ME:
Thanks for the responses. So what I am seeing is any time debt is available under 5%, you ought to take it and invest while just making minimum payments? Because for the last year I put all expenses on a credit card at 0% promo APR while paying the minimums and investing what I would have paid the CC company, and then at the end of the 12 month promo period I did a 0% balance transfer fee to another card. I am currently at a $5500 balance with 14 months left at 0%, and I already have another card picked out with a 0% balance transfer fee that I could put the balance on for another 15 months. Eventually I will have a $15k or so balance that I'll need to pay off in full in the fall of 2019, but in the meantime I'll have gotten 3 years of investing returns without paying a dime of interest.
Why are so few people doing this? Is it just because it's a small amount of money compared to the mortgage? At 10% returns I'm already making $550 a year in free income using this method, and it's very simple to do. Car loans are another obvious candidate, as you can often get 0% interest. The same could be said for undergraduate student loans. Most of them are 3% interest or so (if federal) and the interest is subsidized until after you graduate (meaning you can go 4-5 years at 0% interest. If you don't need the money to actually pay tuition, why not loan up to the hilt and invest it at all? Just curious why it's typically only mortgage loans where people recommend investing instead of paying more on low interest rates.
Why aren't more people doing this?
1) Most people live paycheck to paycheck, investing is a foreign language.
2) You are betting that in 3 years you'll be able to sell the stock for a profit. In 3 years you might be able to do that. Or the market might be down 50% and now you've got a whopping big credit card bill at 20% or more. Won't take long to wipe out any profits at that interest rate.
3) The more you do this, the harder it is to get a great deal on the next 0% card. Or to get one at all, because your % of available credit in use gets higher and higher.
4) Do you really get 0% interest and 0% transfer fee with your new card offers? All the ones I ever see want 3% or more up front as a fee, then 0% for many months afterwards.
1) Most people live paycheck to paycheck, investing is a foreign language.
Well yes of course. I'm referring to people on MMM. I understand why most of society is not doing this. The median net worth in the US is ~$100k. People aren't investing. But I only really hear taking advantage of cheap credit in reference to mortgages on MMM, even though it shouldn't matter what loan you use.
2) You are betting that in 3 years you'll be able to sell the stock for a profit. In 3 years you might be able to do that. Or the market might be down 50% and now you've got a whopping big credit card bill at 20% or more. Won't take long to wipe out any profits at that interest rate.
It's true the markets could be down at that point. Of course that's true for any investment. I won't have a whopping credit card bill either way though. For two months or so before the final bill is due you just save your cash instead of immediately investing it. The cash flow from work will cover the bill, I'm not going to sell any investments or anything.
3) The more you do this, the harder it is to get a great deal on the next 0% card. Or to get one at all, because your % of available credit in use gets higher and higher.
This isn't true. I'm talking about opening 2 extra cards over 3-4 years. Credit churners (a group which I am a part of) open many more cards then this in a shorter time span.
4) Do you really get 0% interest and 0% transfer fee with your new card offers? All the ones I ever see want 3% or more up front as a fee, then 0% for many months afterwards.
Yes. Here's an example. Open this Citi card: https://tinyurl.com/lg9y673
That gives you 21 months of purchases at 0%. Then open this Barclays card with a 0% balance transfer offer and 0% promo APR for 15 months: https://tinyurl.com/h8qvrbr
Transfer your balance on that, then when 15 months are up transfer your balance to the Chase Slate 0% balance transfer card and 0% promo APR for 15 months: https://creditcards.chase.com/slate-credit-card/
Boom. You've just paid for all of your expenses (besides probably rent) with someone else's money for 51 months (4.3 years) without paying a dime of interest, meanwhile all of your cash is invested. If you run say $7k of non-rent expenses per year like me then the average balance on your card over that time was about $15k, meaning over 4 years at 10% compounding you made about $7k in extra income with this method. In the last 3 months before the final balance is due you just save your cashflows to pay off the card.
What am I missing? Why not take advantage of a 0% loan, when this whole thread is advocating investing money rather than paying a 4% loan down?
so the game youre playing used to be popular when fixed interest rates were in the high single digits to low double digits b/c guaranteed return. And i dont remember who one of the main players in that was but he pokes his head in from time to time. He doesnt play this game anymore. using it to invest is treading on a very slippery slope b/c as SwordGuy stated you cant be sure those cards will always be there. if you want to start another thread on this topic go ahead but dont derail this thread - its purely for not paying down your mortgage.
https://www.fatwallet.com/forums/finance/813161
Here is secondcor521's thread from back in the day on how he took your idea to extremes. but he was using fixed interest return whch doesnt exist like it does now. i'm all for a thread on discussing this and looking at the risks. i see them as quite steep.
Hopefully that is not too hard to follow. What I'm hearing as the biggest objection is just that there is risk of not being able to pay off the final bill, and getting stuck with the high interest loans. It's possible but I think very unlikely.
1. I am paying off the final bill with cash flows from the previous few months of work. I am not depending on selling any stock, so there is little risk of needing to sell at a loss.
2. If I were to say get laid off as the bill was coming due, I could sell stock if it were an attractive environment for doing so. I can also pick up a service job pretty easy that would pay $20-25 an hour and allow me to build up cash.
3. If I am totally unable to pay the final bill, and i can't find a 0% balance transfer card, I can always do a transfer to a regular fee card. After 4 years I'd have a $28,000 balance or so, meaning a 3% fee transfer costs $840. That would suck, but it buys me another 15 months to get the cash flow to pay the bill off, and it comes nowhere near the $7,000 or so I already made on the investment.
4. Only if I am laid off, can't find another job to come up with the cash flow, can't sell my stock, and can't qualify for a balance transfer do I ever end up paying the ridiculous 20% APR's. All of these events could occur in a depression-like environment, but even still we're talking about a non-catastrophic amount of money. It would still take 1.5 years at those rates to wipe out the investment gains.
So I ask you, should we be taking advantage of cheap credit in other forms to invest extra money, rather than just mortgages?