Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
Thanks for the advice. I admit I did not look through all the threads on the subject. Although the main idea is to be mortgage free the opposite thought is to have the money work for me that the mortgage is a wash. and the interest is deductible.
The mortgage may be deductible, but your investment income will be taxable, so it's almost a wash. What should matter is if your investments will outperform your rate.
ETA: Actually with the new standard deduction, you might not even want to itemize, in which case you actually need your investment rate to exceed the loan rate by a significant margin to justify attempting the arbitrage strategy. If the rate is low enough it still is likely to work.
There's a lot to be said for the 'freedom and lack of stress' of being mortgage free ... OR for the financial difference gained between the cost of the mortgage and the amount earned for financial investment.
There is no clear answer to that question, except your own personal goals and agenda... and which is worth more to you.
Just remember you are buying your investment leveraged. Would you buy equities on margin? If a treasury pays 2% and is risk free , and interest is 3-4% how much of a risk premium do you want to buy investments with borrowed money ? If I was getting a taxable 6-8 % in a balanced portfolio I would have to think whether an extra 2% is a big enough spread to take on borrowing money to invest. Very different parameters than not being leveraged
First, this is a safe withdrawal problem, similar to the SWR you may have read about when considering how much is safe to pull each year from your retirement account. So it's not only a matter of earning more on your investments than your mortgage interest rate. The sequence of the returns is important too.
Second, and this has already been touched upon... you need to look at the comparison on an after-tax basis. Will you be taking the standard deduction, or itemizing deductions? And even if you are itemizing it is quite possible that the interest is effectively not 100% taxable; it depends on the amount of your other deductions. Then on the investment side will you be paying taxes on some, all, or none of your gains?
Just remember you are buying your investment leveraged. Would you buy equities on margin? If a treasury pays 2% and is risk free , and interest is 3-4% how much of a risk premium do you want to buy investments with borrowed money ? If I was getting a taxable 6-8 % in a balanced portfolio I would have to think whether an extra 2% is a big enough spread to take on borrowing money to invest. Very different parameters than not being leveraged
Your arguments elude me.
"Leverage" and buying on "margin" are just negatively loaded words that do nothing to support the logic of your arguments. This is nothing like borrowing short term, often at high rates, to speculate in the markets.
I have no idea why you bring up treasury rates. Of course, it would not make sense to take a 3.25% mortgage and then invest the money at 2%.
A balanced portfolio is historically going to return 6-8% corrected for inflation and even higher in real rates. That leaves a gain of over 4% after paying the mortgage. That is a nice return considering the alternative which is to put the money in the house and gain nothing. On top of that the returns get bigger and bigger with time. The cost of the mortgage remains the same while the investments compound and grow giving bigger and bigger returns.
First, this is a safe withdrawal problem, similar to the SWR you may have read about when considering how much is safe to pull each year from your retirement account. So it's not only a matter of earning more on your investments than your mortgage interest rate. The sequence of the returns is important too.
Second, and this has already been touched upon... you need to look at the comparison on an after-tax basis. Will you be taking the standard deduction, or itemizing deductions? And even if you are itemizing it is quite possible that the interest is effectively not 100% taxable; it depends on the amount of your other deductions. Then on the investment side will you be paying taxes on some, all, or none of your gains?
Quote:
Originally Posted by jrkliny
Your arguments elude me.
"Leverage" and buying on "margin" are just negatively loaded words that do nothing to support the logic of your arguments. This is nothing like borrowing short term, often at high rates, to speculate in the markets.
I have no idea why you bring up treasury rates. Of course, it would not make sense to take a 3.25% mortgage and then invest the money at 2%.
A balanced portfolio is historically going to return 6-8% corrected for inflation and even higher in real rates. That leaves a gain of over 4% after paying the mortgage. That is a nice return considering the alternative which is to put the money in the house and gain nothing. On top of that the returns get bigger and bigger with time. The cost of the mortgage remains the same while the investments compound and grow giving bigger and bigger returns.
since 1971 a 60/40 has only averaged 5.80% real return after being adjusted for inflation . as well as spent more than 1/4 of the time at a loss .
you keep failing to realize that you are using borrowed money to invest ... that means your downsides are bigger too and require more gains in down years to get back ... as an example someone with a 4% mortgage is still not whole again from more than a year ago because in essence if the market was down 6% they were down 10% ... to come back from being down 10% takes a lot more gain . in fact despite this years run up they are not even whole with july of last year yet ....
so your downside is much greater than just using your own money .
plus if spending down , sequence risk comes in to play too because expenses are greater and your draw rate is greater to compensate for the mortgage and that makes sequence risk more of a factor in down years . it takes more dollars from your holdings to make that mortgage payment in bad years then not make a mortgage payment if you didn't have one . ... anytime you increase the amount being spent down you automatically increase the effect of sequencing
...
Last edited by mathjak107; 09-10-2019 at 06:05 PM..
you keep failing to realize that you are using borrowed money to invest ... that means your downsides are bigger too and require more gains in down years to get back ... as an example someone with a 4% mortgage is still not whole again from more than a year ago because in essence if the market was down 6% they were down 10% ... to come back from being down 10% takes a lot more gain . in fact despite this years run up they are not even whole with july of last year yet ....
so your downside is much greater than just using your own money .
plus if spending down , sequence risk comes in to play too because expenses are greater and that makes sequence risk more of a factor in down years . it takes more dollars from your holdings to make that mortgage payment in bad years then not make a mortgage payment if you didn't have one . ... anytime you increase the amount being spent down you automatically increase the effect of sequencing
...
First, this is not a short term strategy!!!!! There is no reason to play to the common fear of poor markets. We know historically that investments will almost always cover 4%, inflation adjusted, withdrawals for the long term. The mortgage is fixed and inflation adjustments are not needed. Sequence of returns is not a risk. The 4% rule is based on covering the worst situations. Spending down should also not enter the risk considerations. If the home buyer is able to pay for the house, they should not need to spend money that is mortgaged. If so, they are using the mortgage to increase expenses beyond what they can afford.
Your arguments are best called straw men and do not have any weight in the decision. You are typically pretty sound in your financial considerations. I cannot help but think you are just arguing for the fun of it. Or are you just intentionally demonstrating that the negative arguments make no sense and will just result in a loss of several percent compounded over decades?
Mathjak, your PortfolioChart just appeared. Again this is inflation adjusted data. Also it is annual data. Clearly there will be good years and bad years.
Instead of your data, perhaps I should just use the average annual stock market return for my lifetime, which is 12.5%.
Major flip-flopping occurring once again, which has been noted previously.
When I was considering paying down my mortgage faster vs using the extra money to invest in the market, I read on C-D and was advised that investing the money in the market was a much better way to go since one "cannot withdraw money from the walls of the house." My interest rate is low enough to make sense to invest rather than pay down the mortgage faster.
Now this contrary argument is being pushed from a nervous nellie standpoint.
I like what jrkliny is doing, that is definitely letting money work for you *especially when the interest rate on a mortgage is low enough to make that possible*. The magic of time and compounding and an aggressive enough allocation over the long term makes this an optimal choice.
Actually, I avoid being "aggressive" with allocations and have instead mentioned a 60:40 allocation. A higher allocation would very likely yield much higher returns over time. The issue is the same as for any other investments involving stocks. A downturn in the markets might take much longer for recovery.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
