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View Poll Results: Mortgage or Investments
No mortgage pay 350k for house 54 51.92%
Mortgage with money in investments 50 48.08%
Voters: 104. You may not vote on this poll

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Old 09-06-2019, 02:05 AM
 
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Originally Posted by jrkliny View Post
Some people just have to think investing is "speculating" or gambling. Right now mortgages are a bit over 3%. Do you really think it is speculative to expect to make that level of return over years of investing?

depends ... while it is likely you can beat 3% remember you are leveraged . the real question is whether you would buy your investments with borrowed money ?

like kitces points out when you get involved with mortgage money it is the equities you are really buying on leverage .

if mortgages are 3 to 4% and a risk free treasury is 2-3% then in order to invest in equities on what amounts to margin but with a fixed rate and no margin calls , you want a certain amount of money over a risk free treasury for taking the risk with BORROWED MONEY . ..

if you are going to put that money in a 40-60% equity portfolio you need to really look at the risk premium you are attempting to get , not with your own money as we typically do but with borrowed money .

only you can decide in that case if it is worth doing . so far it has been worth doing but that is because we have not had any kind of extended drop yet .

so far for the last year from sept to august , the s&p is still down about 1% . while you would be paying 3-4% interest and risk free treasuries paid about 2% so for the past year not worth the risk . so this is going to depend on just when someone starts retirement and starts spending down creating sequence risk . the results will be very individualized for that individual depending when they started drawing money down .

over the last year it is like losing 5% that is no longer available forever to grow again even if things recover because one is spending down and this extra 5% is on top of the money they are drawing out to live on so that is almost a 10% drop in portfolio value over the year . . it is like having a string of losing trades if you weren't spending down . .


covering that mortgage while spending down creates very different sequence risk when you don't do better and that can put extra demands on the up years to do better.

so noooooooo i am not saying it can't be worth it , but it is not a simple case of just investing the money because you are in effect buying on leverage and borrowed money and the down years are magnified as well so the fact you are putting the money in a balanced portfolio may not carry enough of a risk premium over just a risk free treasury bond to want to use borrowed money , take on that extra risk of buying on what in effect is margin and paying that mortgage may offer the better RISK VS REWARD . IT IS NOT JUST ABOUT THE REWARD IN THIS CASE . IT IS A QUESTION OF IS THE REWARD GOING TO BE WORTH DOING THIS WITH LEVERAGED MONEY WHERE ANY DOWN YEARS ARE ALSO MAGNIFIED ?

so ask yourself if you would buy stocks by borrowing money ? then you have the answer to which way you should go .

Last edited by mathjak107; 09-06-2019 at 03:22 AM..
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Old 09-06-2019, 08:46 AM
 
6,480 posts, read 4,885,492 times
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There should be ZERO risk involved.

First being retired and spending down Other investments should not influence this decision. This should be a clean decision of either buying or taking a mortgage. Anyone taking the mortgage with the idea of using the cash to spend would be at risk. Nor should this be a short term decision. If you take a mortgage versus paying for the house the plan should be to keep the house and the mortgage for at least 5 or more years.

Again, longer term there is ZERO risk! How do I know that? Firecalc and the 4% rule tells us that we can expect close to 100% success pulling 4% per year. In fact the 4% rule means pulling even more based on inflation so there is an even bigger safety margin. A mortgage in the 3-4% range is no risk over a period of years. Of course, that is not true short term, which is what everyone seems to be concerned about. How high can the mortgage go before the risk becomes unacceptable? That gets tougher because the risk grows. Personally I would look seriously and probably avoid a decision when the mortgage rates exceed 5-6%. The returns decrease and risk of not making money increases. BTW, many people just get confused on the risks. If you have a high mortgage rate and investments do poorly, that does not mean you lose everything. It means you fail to make money and the house costs you a bit more than it should have. Again, this is an entirely different situation than using the money to meet daily expenses. This is a longer range decision and the gains that accrue will be available years later. I have been invested like this for 6 years since I bought my house. Most years I made good money on the investments. A couple of years returns have been flat or negative. Overall I am still well over $100K ahead on a $330K mortgage. By the end of the mortgage it is likely that I will be $500K - $1M ahead. I might start spending that way before then or it will add to inheritance money for my kids.
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Old 09-06-2019, 08:55 AM
 
73,299 posts, read 73,074,368 times
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Quote:
Originally Posted by jrkliny View Post
There should be ZERO risk involved.

First being retired and spending down Other investments should not influence this decision. This should be a clean decision of either buying or taking a mortgage. Anyone taking the mortgage with the idea of using the cash to spend would be at risk. Nor should this be a short term decision. If you take a mortgage versus paying for the house the plan should be to keep the house and the mortgage for at least 5 or more years.

Again, longer term there is ZERO risk! How do I know that? Firecalc and the 4% rule tells us that we can expect close to 100% success pulling 4% per year. In fact the 4% rule means pulling even more based on inflation so there is an even bigger safety margin. A mortgage in the 3-4% range is no risk over a period of years. Of course, that is not true short term, which is what everyone seems to be concerned about. How high can the mortgage go before the risk becomes unacceptable? That gets tougher because the risk grows. Personally I would look seriously and probably avoid a decision when the mortgage rates exceed 5-6%. The returns decrease and risk of not making money increases. BTW, many people just get confused on the risks. If you have a high mortgage rate and investments do poorly, that does not mean you lose everything. It means you fail to make money and the house costs you a bit more than it should have. Again, this is an entirely different situation than using the money to meet daily expenses. This is a longer range decision and the gains that accrue will be available years later. I have been invested like this for 6 years since I bought my house. Most years I made good money on the investments. A couple of years returns have been flat or negative. Overall I am still well over $100K ahead on a $330K mortgage. By the end of the mortgage it is likely that I will be $500K - $1M ahead. I might start spending that way before then or it will add to inheritance money for my kids.
your logic is flawed .. no matter how you slice it you are buying those investments on what in effect is margin ...you need to consider what is it worth to take on that risk . it is not just a normal investment situation ...

i am not saying it is not worth it , but if you are buying investments instead of paying off the house you are leveraged on those investments and one must look at things differently .. every down year is going to be far more painful then otherwise. if a balanced portfolio returns 6-8% historically and one is paying 4% interest and risk free bonds are paying 2% , there is very little risk premium in this case for buying leveraged equities .

. this is not just a case of normal investing risk premiums because the downside is greater with leveraged dollars . i suggest you carefully read the kitces article on this exact thing again , only read it very carefully and understand what he is saying this time because his view of how you need to look at leveraged investments is correct.

the problem is we like to twist things round in our head and go our money is in the investments and the mortgage is in the house .. but that thinking is flawed because it is identical to your money going in the house and the mortgage money is buying the investments .

it is all being distributed from the same pile of money .... we can say it's 50/50 too half our own money in the investments , half leveraged .

but at the end of the day we do need to remember we are buying on margin in a way ... if you would not buy equities on margin for a 2% risk premium over a 100% safe treasury then you may need to reconsider what one is doing .

Last edited by mathjak107; 09-06-2019 at 09:04 AM..
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Old 09-06-2019, 10:48 AM
 
6,480 posts, read 4,885,492 times
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Originally Posted by mathjak107 View Post
.... leveraged dollars.... ..
Leveraged sounds horrible and risky. I guess that is what a day trader does when they speculate on short term changes on individual stocks. Or is it like borrowing from the mafia to play in the Vegas casinos.

Everyone wants to use emotionally loaded words when they make arguments. There is a difference between investing and gambling or speculating. With a low cost mortgage and a few years to even out the possibilities and the numbers are clear. You win. That win can be relatively small but it more likely to be several times the amount borrowed.

When we are retired and pull 4% from out investments, we have leveraged our lifestyle based on investment returns. If they fail, we have to cut back. Those risks are very minimal and if the 4% is fixed and not inflation adjusted, the risk is virtually zero. We have the same risk when covering a 4% mortgage. Of course the idea is not to just break even. As you are well aware the long term results are likely to be way more than doubling our initial portfolio in addition to the 4% withdrawals.

We all have enough time dealing with facts without throwing in those emotionally charged words.
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Old 09-06-2019, 12:42 PM
 
73,299 posts, read 73,074,368 times
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Originally Posted by jrkliny View Post
Leveraged sounds horrible and risky. I guess that is what a day trader does when they speculate on short term changes on individual stocks. Or is it like borrowing from the mafia to play in the Vegas casinos.

Everyone wants to use emotionally loaded words when they make arguments. There is a difference between investing and gambling or speculating. With a low cost mortgage and a few years to even out the possibilities and the numbers are clear. You win. That win can be relatively small but it more likely to be several times the amount borrowed.

When we are retired and pull 4% from out investments, we have leveraged our lifestyle based on investment returns. If they fail, we have to cut back. Those risks are very minimal and if the 4% is fixed and not inflation adjusted, the risk is virtually zero. We have the same risk when covering a 4% mortgage. Of course the idea is not to just break even. As you are well aware the long term results are likely to be way more than doubling our initial portfolio in addition to the 4% withdrawals.

We all have enough time dealing with facts without throwing in those emotionally charged words.
you are correct , leveraged sounds horrible but that is exactly what you are doing . as much as markets bounced back since january if someone was invested with mortgage money instead of the house they woud have been down the end of august by 1% plus interest making them down maybe 5% not 1% right up until last week.

even a modest recession that is extend out a bit can see lots of those gains evaporate because of the leveraging . plus now the gains have to be way bigger just to get back .

all i am saying is people have to really look at this and understand that if they would not borrow money to put in equities they better think twice about taking a mortgage instead of paying off the house or the mortgage . most do not understand this is what they are doing .
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Old 09-06-2019, 12:46 PM
 
6,480 posts, read 4,885,492 times
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Quote:
Originally Posted by mathjak107 View Post
you are correct , leveraged sounds horrible but that is exactly what you are doing . as much as markets bounced back since january if someone was invested with mortgage money instead of the house they woud have been down the end of august by 1% plus interest making them down maybe 5% not 1% right up until last week.

even a modest recession that is extend out a bit can see lots of those gains evaporate because of the leveraging . plus now the gains have to be way bigger just to get back .
This strategy is not for the short term. Again the minimum time window should probably be at least 5 years. I would not buy a house either unless I expected to live in it for at least 5 years. I doubt you would recommend anyone buy stocks or stock funds unless they expected to remain invested for at least a few years.
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Old 09-06-2019, 12:49 PM
 
73,299 posts, read 73,074,368 times
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Originally Posted by jrkliny View Post
This strategy is not for the short term. Again the minimum time window should probably be at least 5 years. I would not buy a house either unless I expected to live in it for at least 5 years. I doubt you would recommend anyone buy stocks or stock funds unless they expected to remain invested for at least a few years.
irelevant short term or not . the situation is what is. the investment being leveraged has a lot more downside this way and requires a lot more up side to get back ... someone looking at worth it or not has to see what the risk premium is over a risk free treasury if they are going to be borrowing money to invest which is what they are doing . personally i don't think if i was in a balanced portfolio i would accept 1 to 2% as a risk premium in retirement with a much greater downside because of leverage ..if i was 100% equity it is a different story . but i doubt i would borrow money and take on more downside to put it in a balanced portfolio , not enough reward to warrant the downside of taking on leverage ..

it has to make sense and the borrowed money in a balanced portfolio to me is very poor risk vs reward .

it is not about just the interest .. the leverage requires much larger gains just to get even again after a dip .

Last edited by mathjak107; 09-06-2019 at 01:05 PM..
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Old 09-06-2019, 07:59 PM
 
Location: Myrtle Creek, Oregon
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Quote:
Originally Posted by mathjak107 View Post
irelevant short term or not . the situation is what is. the investment being leveraged has a lot more downside this way and requires a lot more up side to get back ... someone looking at worth it or not has to see what the risk premium is over a risk free treasury if they are going to be borrowing money to invest which is what they are doing . personally i don't think if i was in a balanced portfolio i would accept 1 to 2% as a risk premium in retirement with a much greater downside because of leverage ..if i was 100% equity it is a different story . but i doubt i would borrow money and take on more downside to put it in a balanced portfolio , not enough reward to warrant the downside of taking on leverage ..

it has to make sense and the borrowed money in a balanced portfolio to me is very poor risk vs reward .

it is not about just the interest .. the leverage requires much larger gains just to get even again after a dip .
I often get chastised for "timing the market," but there are times when opportunities present themselves and times when they vanish. If you mortgaged yourself to the hilt in 2010 and put the whole wad into equities, it was a money making machine. Houses were recovering from a horrible depressed markets, stocks were pulling out of a deep recession, and mortgage interest rates were hovering around 3%. On a 15 year note you could even get 2.9%.

Fast forward 9 years and that ship has sailed. Interest rates are climbing, housing prices are past their pre-crash highs, and the equities market has stalled. A wise investor will switch to a new strategy. The time to buy on margin is after the crash, not before.
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Old 09-07-2019, 03:40 AM
 
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Originally Posted by Larry Caldwell View Post
I often get chastised for "timing the market," but there are times when opportunities present themselves and times when they vanish. If you mortgaged yourself to the hilt in 2010 and put the whole wad into equities, it was a money making machine. Houses were recovering from a horrible depressed markets, stocks were pulling out of a deep recession, and mortgage interest rates were hovering around 3%. On a 15 year note you could even get 2.9%.

Fast forward 9 years and that ship has sailed. Interest rates are climbing, housing prices are past their pre-crash highs, and the equities market has stalled. A wise investor will switch to a new strategy. The time to buy on margin is after the crash, not before.
let us all know when you get the memos to switch ....there is not a long term investor here that hasn't timed things . but eventually we miss and get set behind and we are now behind had we just sat and held . been there done that
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Old 09-07-2019, 05:18 AM
 
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Originally Posted by jrkliny View Post
People also lose houses that they owned outright.
Yes, of course. People can lose anything.
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