Borrowing money to invest. Good idea?

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miamivice
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Borrowing money to invest. Good idea?

Post by miamivice »

With mortgage rates low, I can get a 10 year HELOC for a 4% fixed interest rate. I can borrow a six figure sum if I choose.

It is tempting to invest it in the stock market, as the market has returned a 8.5% average ROI for me over the last 10 years.

Of course, there would be risk.

Good idea or bad idea?
Niam
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Re: Borrowing money to invest. Good idea?

Post by Niam »

miamivice wrote:With mortgage rates low, I can get a 10 year HELOC for a 4% fixed interest rate. I can borrow a six figure sum if I choose.

It is tempting to invest it in the stock market, as the market has returned a 8.5% average ROI for me over the last 10 years.

Of course, there would be risk.

Good idea or bad idea?
Terrible idea. Even assuming you return 8.5%/year, which is an assumption you should definitely not make [see the countless disclaimers about past performance not predicting future performance], what's the best case result in that scenario? Take 8.5% investment returns --> take out all the taxes you'd pay at the federal and state levels --> add all transaction costs involved in getting the loans and then trading that money, and what are you left with? Doubt its much higher than 4%, let alone worth the substantial risk and the time/effort.
GoldenFinch
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Re: Borrowing money to invest. Good idea?

Post by GoldenFinch »

Bad idea.
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Re: Borrowing money to invest. Good idea?

Post by cfs »

Avoid
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arcticpineapplecorp.
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Re: Borrowing money to invest. Good idea?

Post by arcticpineapplecorp. »

miamivice wrote:With mortgage rates low, I can get a 10 year HELOC for a 4% fixed interest rate. I can borrow a six figure sum if I choose.

It is tempting to invest it in the stock market, as the market has returned a 8.5% average ROI for me over the last 10 years.

Of course, there would be risk.

Good idea or bad idea?
I wouldn't do it. Let's say you borrow $100,000 (the lower bound of your "six figure sum") invest it and the market goes down 30%. How will you feel about paying interest on a $100,000 that's now only worth $70,000? What if it then takes years to get that $70,000 back to $100,000. It won't feel great continuing to pay interest on a depreciated asset. That's the reason why people try to get rid of their car loans sooner than later. You wanna pay interest on something that has the possibilty of going down for 10 years?

Also, the reason I put the word "has" in red (from your post) is because you should go back and re-read that. Just because it "has" gone up over the past 10 years doesn't mean it "has" to over the next 10 years.

You know investors expect their stocks to double every decade, right? Unfortunately they don't realize a decade equals 10 years, but 10 years doesn't have to equal a decade. Look at what I mean below. See what happened from 1/1/2000-12/31/2009 (ten year period):

Image

Not so well, huh? Investors total investment would have been down 2% from where they started 10 years prior.

But what about from 1/1/2003-12/31/2012 (a different 10 year period)?

Image

Ah, that's much better...doubled your money (and then some).

Now the question is, will the next 10 years look like the first graph or the second?

You remember that Saturday Night Live commercial titled "Bad Idea Jeans"? This would make for a great Bad Idea Jeans commercial.
Last edited by arcticpineapplecorp. on Tue Aug 16, 2016 8:31 pm, edited 3 times in total.
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Rob Bertram
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Re: Borrowing money to invest. Good idea?

Post by Rob Bertram »

When financing rates are as low as 0.5%, paying 4% to borrow is criminal.

There are plenty of other discussions on borrowing to invest if you search. Here are two recent topics:
viewtopic.php?f=10&t=196723
viewtopic.php?f=10&t=143037
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Toons
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Re: Borrowing money to invest. Good idea?

Post by Toons »

Bad Idea.
Save.
Then Invest.






:happy
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SmileyFace
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Re: Borrowing money to invest. Good idea?

Post by SmileyFace »

With the market where it is I would think you would be more tempted to do the opposite (sell taxable equity to pay off the mortgage).
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Watty
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Re: Borrowing money to invest. Good idea?

Post by Watty »

There is a wiki on this.

https://www.bogleheads.org/wiki/Paying_ ... _investing

There have been a number of posts asking about the same question. In addition other problems the two big drawbacks I respond with are;

1) If you invest your with your normal asset allocation of anywhere near the old saying of "your age in bonds" then you will be investing a lot of the money in bonds that are paying an interest rate that is lower then your mortgage interest rate. You will also be paying taxes on your gains. Combined getting a higher after tax investing income is harder than it sounds.

2) You will have a sequence of returns risk and I have posted this example before.
 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also paid a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.
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Earl Lemongrab
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Re: Borrowing money to invest. Good idea?

Post by Earl Lemongrab »

I'm not so hard against the idea, in fact I did it myself a few years ago. I had solid resources and got a very good interest rate. In my opinion, that is NOT a good interest rate.

Earl
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Earl Lemongrab
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Re: Borrowing money to invest. Good idea?

Post by Earl Lemongrab »

Watty wrote:2) You will have a sequence of returns risk and I have posted this example before.
 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also paid a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.
You're assuming that the only way to pay the mortgage is out of the investments, which 99% of the time is not the case. If one services the loan through typical cash flow from wages, then your example is flawed. Even more so if one has other investments in fixed income that can be tapped to make that small monthly payment as needed.

It would be helpful to have a full financial profile of the OP before rendering judgment.

Earl
Caduceus
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Re: Borrowing money to invest. Good idea?

Post by Caduceus »

Yes, it's a good idea, assuming you get a good enough interest rate. I would borrow unlimited amounts of money at, say, 2%. Not sure about 4%
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Re: Borrowing money to invest. Good idea?

Post by whodidntante »

It's not stupid, but it's far more risk than most people are comfortable with. If you do it, there are cheaper ways than a HELOC. Futures are much cheaper, and you can get margin rates less than 4%. You can also gain multiples of leverage by combining futures and margin, but that's a good way to find yourself with a negative net worth.

Do you actually need to take this risk, or will disciplined investing on a cash basis be sufficient to accomplish your goals?
orca91
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Re: Borrowing money to invest. Good idea?

Post by orca91 »

miamivice wrote:With mortgage rates low, I can get a 10 year HELOC for a 4% fixed interest rate. I can borrow a six figure sum if I choose.

It is tempting to invest it in the stock market, as the market has returned a 8.5% average ROI for me over the last 10 years.

Of course, there would be risk.

Good idea or bad idea?
Of course they're only predictions, but many predict lower returns going forward for a while. Returns in the 4-6% real return range. Do you like those odds of actually beating your 4% over 10 years? I'd pass.
LateStarter1975
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Re: Borrowing money to invest. Good idea?

Post by LateStarter1975 »

Toons wrote:Bad Idea.
Save.
Then Invest.






:happy

This
Debt is dangerous...simple is beautiful
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Watty
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Re: Borrowing money to invest. Good idea?

Post by Watty »

Earl Lemongrab wrote:
Watty wrote:2) You will have a sequence of returns risk and I have posted this example before.
 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also paid a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.
You're assuming that the only way to pay the mortgage is out of the investments, which 99% of the time is not the case. If one services the loan through typical cash flow from wages, then your example is flawed. Even more so if one has other investments in fixed income that can be tapped to make that small monthly payment as needed.

It would be helpful to have a full financial profile of the OP before rendering judgment.

Earl
I agree that in practice the mortgage payment would likely be paid out of different account but the $500 a month still needs to be paid out of some account when there is a mortgage. The example is greatly simplified but if you wanted to list two accounts then it here is how I would look at it.

Assume there are an additional $6,000 worth of deposits into some other checking account then the scenarios would look like this.

1) As stated;
a) Investment account balance $84K
b) Other checking account $6,000, from additional $6,000 in unspent deposits.
c) Home equity $0 (ignoring the paid down principal)
d) Total $90,000

2) Mortgage payments made out of checking account.
a) Investment account balance $90,000 after 10% decline.
b) Other checking account balance, $0 from additional $6K deposit less $6K mortgage payments.
c) Home equity $0 (ignoring the paid down principal)
d) total $90,000

3) If the $100K had been put into home equity instead of investing it.
a) Investment account balance $0
b) Other checking account $6,000, from additional $6,000 in unspent deposits.
c) Home equity $100K
c) Total $106,000 in home equity and checking

The second scenario is what you mentioned but that the ending total is the same as my first example. They are both $16,000 behind the third example with no mortgage.
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Earl Lemongrab
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Re: Borrowing money to invest. Good idea?

Post by Earl Lemongrab »

Temporarily behind. A properly designed portfolio wouldn't require selling anything from the stocks while they were down. And sure, the "temporarily" might be a lengthy period, but that's always the risk with stocks. You could run the same analysis to demonstrate that keeping all your money in CDs was superior.

Home equity, whether purchase mortgages or equity loans, is a fairly low-cost and low-risk approach given the right circumstances and plan. It's not for everyone, but nothing in investing really is.

Earl
azanon
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Re: Borrowing money to invest. Good idea?

Post by azanon »

I never know how to answer this question, because strictly speaking, if you have a mortgage or a car loan, and you also invest, you're already doing it and a heck of a lot of people (including myself) fall in this category.

So again strictly speaking, if you have no intention of using any margin to invest, you'd pay off every debt before you'd invest a dime because otherwise, you're effectively margin investing at whatever rate(s) your loan(s) are while you're investing.

But that specific type of borrowing at that rate for investing? No I don't recommend that. But I'm not going to go so far as to say don't start your IRA until you have your house fully paid for (if you're buying) and only if you have no other loans.
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Re: Borrowing money to invest. Good idea?

Post by BolderBoy »

miamivice wrote:With mortgage rates low, I can get a 10 year HELOC for a 4% fixed interest rate. I can borrow a six figure sum if I choose. It is tempting to invest it in the stock market, as the market has returned a 8.5% average ROI for me over the last 10 years.
This precise reasoning was used by many folks in the irrational exuberance days of 1999. Guess what happened to most of them?
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
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Re: Borrowing money to invest. Good idea?

Post by bottlecap »

Great idea if the market soars. Useless to bad if the market goes nowhere. Very bad idea if the market goes down. Devastatingly bad idea if the market crashes.

If it works, it won't make you much richer. If it doesn't work, you could wind up in bankruptcy. Small reward vs. catastrophic risk.

Why make that bet?

JT
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101
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Re: Borrowing money to invest. Good idea?

Post by 101 »

The correct comparison is with bonds, not stocks. The wiki has more details:
https://www.bogleheads.org/wiki/Paying_ ... _investing

Total Bond Market's SEC Yield right now is 1.78%. I would not consider borrowing at 4% so you can invest at 1.78% to be a good strategy for making money.
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Earl Lemongrab
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Re: Borrowing money to invest. Good idea?

Post by Earl Lemongrab »

bottlecap wrote:Great idea if the market soars. Useless to bad if the market goes nowhere. Very bad idea if the market goes down. Devastatingly bad idea if the market crashes.

If it works, it won't make you much richer. If it doesn't work, you could wind up in bankruptcy. Small reward vs. catastrophic risk.
I don't follow the reasoning. You're only talking about a 100k with a reasonable monthly debt service. How is it going to be devastating? If the debt to equity ratio is in a tolerable range, say 50% or less, then even bad economic times would allow selling the property to pay it off.

People have mortgages and invest rather than pay down the balance all the time. Do you think that they are taking catastrophic risk?

Some here have this odd dichotomy between a purchase mortgage and a cash-out loan that doesn't make a lot of sense.

Earl
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Earl Lemongrab
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Re: Borrowing money to invest. Good idea?

Post by Earl Lemongrab »

101 wrote:The correct comparison is with bonds, not stocks.
That makes no sense. You can't ever guarantee that stocks will beat anything. The OP is buying stocks, so stock return is what you compare to.

Earl
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Re: Borrowing money to invest. Good idea?

Post by Earl Lemongrab »

letsgobobby wrote:Bad idea. I can think of worse ones - like, I don't know, speculating on raw land when you have no particular experience or knowledge about land development - but this is pretty bad.
Why? Is having bought a house with a mortgage then buying stocks with your pay just as bad an idea?

Earl
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Earl Lemongrab
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Re: Borrowing money to invest. Good idea?

Post by Earl Lemongrab »

letsgobobby wrote:
Earl Lemongrab wrote:Why? Is having bought a house with a mortgage then buying stocks with your pay just as bad an idea?
Yes, for many people.
You're consistent anyway. I would bet that a very high percentage of Bogleheads have done that at one time or another.

Earl
101
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Re: Borrowing money to invest. Good idea?

Post by 101 »

Earl Lemongrab wrote:
101 wrote:The correct comparison is with bonds, not stocks.
That makes no sense. You can't ever guarantee that stocks will beat anything. The OP is buying stocks, so stock return is what you compare to.

Earl
If OP would like to buy stocks and has any bond fund(s) earning less than 4%, they would come out ahead by funding the stock purchase through selling bonds instead of acquiring an equal amount of 4% debt.
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Re: Borrowing money to invest. Good idea?

Post by Earl Lemongrab »

101 wrote:If OP would like to buy stocks and has any bond fund(s) earning less than 4%, they would come out ahead by funding the stock purchase through selling bonds instead of acquiring an equal amount of 4% debt.
I disagree because that affects liquidity. The loan and the home equity should not be considered part of the portfolio, so doing what you suggest changes the asset allocation.

Earl
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Re: Borrowing money to invest. Good idea?

Post by dotstar »

Earl Lemongrab wrote:

[ ... ]
Why? Is having bought a house with a mortgage then buying stocks with your pay just as bad an idea?

Earl
This is an alternate way of asking the commonly asked question "I have some cash, should I pay my house off early, or invest the money".

When we ask it that way, which is common on the forum, the opinions are mixed - perhaps 50:50.

When asked this way "Should I take a mortgage and invest" the crowd seems to roar against the idea.
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Re: Borrowing money to invest. Good idea?

Post by furikake »

Very bad idea!! But if you go to the MMM board, most will tell you that it's a great idea. :D
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Re: Borrowing money to invest. Good idea?

Post by 101 »

Earl Lemongrab wrote:
101 wrote:If OP would like to buy stocks and has any bond fund(s) earning less than 4%, they would come out ahead by funding the stock purchase through selling bonds instead of acquiring an equal amount of 4% debt.
I disagree because that affects liquidity. The loan and the home equity should not be considered part of the portfolio, so doing what you suggest changes the asset allocation.

Earl
Yes, paying down debt decreases one's liquidity. This and many other considerations are discussed in the wiki.
sc9182
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Re: Borrowing money to invest. Good idea?

Post by sc9182 »

dotstar wrote:
Earl Lemongrab wrote:

[ ... ]
Why? Is having bought a house with a mortgage then buying stocks with your pay just as bad an idea?

Earl
This is an alternate way of asking the commonly asked question "I have some cash, should I pay my house off early, or invest the money".

When we ask it that way, which is common on the forum, the opinions are mixed - perhaps 50:50.

When asked this way "Should I take a mortgage and invest" the crowd seems to roar against the idea.
Not same idear: If you have cash, you have no payments (on that cash/principal) and nobody forecloses your home; While if you took loan/home-equity, and somehow lose principal playing in the market, or much worse not-able-to-make payments -- you could risk losing home !! Its actually same answer doled out by multiple BH'ers, in a different way - don't create/increase "more" failure-points/fault-zones (ie., missing a payment or two could put your bigger/critical investment such as home - @ risk!).

OP - you are comingling different risk-pools for slight edge in investment return. Also, unless you have taken "fixed-rate" home equity instead of HELOC -- now you are at whims of "prime" rate on HELOC.
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Re: Borrowing money to invest. Good idea?

Post by bottlecap »

Earl Lemongrab wrote:
bottlecap wrote:Great idea if the market soars. Useless to bad if the market goes nowhere. Very bad idea if the market goes down. Devastatingly bad idea if the market crashes.

If it works, it won't make you much richer. If it doesn't work, you could wind up in bankruptcy. Small reward vs. catastrophic risk.
I don't follow the reasoning. You're only talking about a 100k with a reasonable monthly debt service. How is it going to be devastating? If the debt to equity ratio is in a tolerable range, say 50% or less, then even bad economic times would allow selling the property to pay it off.

People have mortgages and invest rather than pay down the balance all the time. Do you think that they are taking catastrophic risk?

Some here have this odd dichotomy between a purchase mortgage and a cash-out loan that doesn't make a lot of sense.

Earl
You misunderstand the nature of the risk you took. You also misunderstand the financial position of people who consider using HELOC's to invest.

Most people who have a mortgage and investments do not have a choice and they must live somewhere. The OP is borrowing money against existing equity to risk VOLUNTARILY. There's a huge difference.

And, if you have a boat load of cash sitting around doing nothing, then why not invest it instead of taking a HELOC and paying interest to invest? The only people getting a HELOC and investing the money is because they don't have the cash cushion to invest outright. These are the people who can least afford to take risk.

So you either have the money to invest and are paying extra to do so (dumb), or you don't have the money and are taking extra risk to do so with out the appropriate risk-adjusted compensation (also dumb). The fact that YOU chose to do it and the risk did not come home to roost does not mean that it wasn't a pretty bad idea.

You are getting very little upside and a lot of downside. You are subjecting yourself to two risks: stock market risk and real estate risk. To really justify that risk, you need to have a decent possibility of hitting a home run - that is, getting really lucky in both markets. This is technically possible, but quite unlikely.

The more likely scenario is that if you lose on your stock market bet, the housing market is soon to follow, doubling your losses. And if you needed a HELOC to invest, you can't afford this kind of loss in the first place.

Regardless, large risk with a small potential return is a poor bet by any definition.

JT
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Re: Borrowing money to invest. Good idea?

Post by drkathryn »

If you could borrow it, interest free, from a Dutch uncle, then it might be a good idea. Otherwise, no.
goldendad
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Re: Borrowing money to invest. Good idea?

Post by goldendad »

No it is not. You need to sleep at night.
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Re: Borrowing money to invest. Good idea?

Post by drkathryn »

goldendad wrote:No it is not. You need to sleep at night.
Why are you telling me when to go to bed? Ok, going to bed now, happy? :P
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Re: Borrowing money to invest. Good idea?

Post by grabiner »

dotstar wrote:
Earl Lemongrab wrote:

[ ... ]
Why? Is having bought a house with a mortgage then buying stocks with your pay just as bad an idea?

Earl
This is an alternate way of asking the commonly asked question "I have some cash, should I pay my house off early, or invest the money".

When we ask it that way, which is common on the forum, the opinions are mixed - perhaps 50:50.

When asked this way "Should I take a mortgage and invest" the crowd seems to roar against the idea.
I often post on this, and there are several differences.

Most mortgage versus investing decisions are whether to pay extra against a mortgage or invest in a 401(k). Investing in the 401(k) is often a better deal than paying off the mortgage, because mortgage interest is deductible, while 401(k) investments grow tax-deferred. In addition, the benefit of tax-deferred investment lasts even after the mortgage is gone. The OP is apparently considering a loan to make taxable investments.

Paying down a mortgage is less valuable than not taking one out. If you make an extra payment on a mortgage with ten years left, this is equivalent to buying a 10-year bond. If you pay off an entire ten-year loan (or don't take one out in the first place), this is equivalent to buying a bond portfolio from 1-120 months, which has a duration of less than 5 years.

If you pay down a mortgage, you have already paid the closing costs, so you earn the interest rate. If you avoid taking out a mortgage, you avoid the closing costs, so you earn a larger benefit than the interest rate.

And first mortgage rates tend to be lower than home-equity rates. The OP is considering a 10-year loan at 4%. The interest rate on 10-year mortgages is about 2.75%, and if you currently have one over 3%, you should probably refinance it.
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Re: Borrowing money to invest. Good idea?

Post by StevieG72 »

Bad idea
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Re: Borrowing money to invest. Good idea?

Post by mikep »

YES!! I hold investments and keep a mortgage so you'll be in the same position as me. I would get a fixed not a HELOC though, and a no cost mortgage. Those who tell you no will also tell me the contradictory answer to not pay off my house either at such a low rate and rather invest it.
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Re: Borrowing money to invest. Good idea?

Post by Earl Lemongrab »

I think those who think there is a difference between not using extra cash to pay off a mortgage and borrowing to invest are guilty of anchoring. Properly done, and with the right resources, borrowing to invest is no more risky than not paying off a mortgage.

In my case, there was essentially no risk in the way people mean. My house was not at risk in the slightest. In the case of the OP, we just don't know because we don't have the full story. What are the finances before and after? I agree that a HELOC isn't the tool I'd use here. A cash-out fixed rate at under 3%, tax-deductible interest, that would be pretty tempting. Mine was a 5-year at 2%, and worked pretty well.

Earl
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Re: Borrowing money to invest. Good idea?

Post by bottlecap »

Earl Lemongrab wrote:I think those who think there is a difference between not using extra cash to pay off a mortgage and borrowing to invest are guilty of anchoring. Properly done, and with the right resources, borrowing to invest is no more risky than not paying off a mortgage.
I still don't understand how, if you have the "right resources", paying interest to invest makes sense.

Granted, if you have the money you borrow against your home sitting in an FDIC insured bank account, you can pay off the loan if you lose the entire amount and you're not any more "at risk."

But save for some very unusual situations that the OP has not described, why would you do this? You are just taking risk with a guaranteed drag on your return.
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F150HD
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Re: Borrowing money to invest. Good idea?

Post by F150HD »

miamivice wrote:With mortgage rates low, I can get a 10 year HELOC for a 4% fixed interest rate. I can borrow a six figure sum if I choose.

It is tempting to invest it in the stock market, as the market has returned a 8.5% average ROI for me over the last 10 years.

Of course, there would be risk.

Good idea or bad idea?

are you a gambler?
Long is the way and hard, that out of Hell leads up to light.
michaeljc70
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Re: Borrowing money to invest. Good idea?

Post by michaeljc70 »

Part of the reason I lost almost 80% of my portfolio in 2007-2009 was leverage. Luckily I gambled on 3X financial ETFs and got my money back plus some. Lesson learned. Now I invest only money I have, keep an emergency fund, and have a simple low fee portfolio.
BlueCable
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Re: Borrowing money to invest. Good idea?

Post by BlueCable »

Well, this thread has me wondering about my mortgage and car payment.

We have ~$110,000 left on our mortgage, but we are maxing out our tax-advantaged and putting additional money into taxable accounts. Mortgage at 3.375%, $18k on car at 2.75%.

Should I be paying off my mortgage instead? We are 30, saving about 50% of our income.
orca91
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Re: Borrowing money to invest. Good idea?

Post by orca91 »

BlueCable wrote:Well, this thread has me wondering about my mortgage and car payment.

We have ~$110,000 left on our mortgage, but we are maxing out our tax-advantaged and putting additional money into taxable accounts. Mortgage at 3.375%, $18k on car at 2.75%.

Should I be paying off my mortgage instead? We are 30, saving about 50% of our income.
I would if you can max out tax advantaged and have money left over. I would pay off debt before investing in taxable. But, that's just me. Others would say differently.
BW1985
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Re: Borrowing money to invest. Good idea?

Post by BW1985 »

dotstar wrote:
When asked this way "Should I take a mortgage and invest" the crowd seems to roar against the idea.
Not the case when I asked the question back in December. More people said take the mortgage and invest. I was maxing retirement space either way, so the investing was taxable.
Chase the good life my whole life long, look back on my life and my life gone...where did I go wrong?
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Earl Lemongrab
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Re: Borrowing money to invest. Good idea?

Post by Earl Lemongrab »

michaeljc70 wrote:Part of the reason I lost almost 80% of my portfolio in 2007-2009 was leverage. Luckily I gambled on 3X financial ETFs and got my money back plus some. Lesson learned. Now I invest only money I have, keep an emergency fund, and have a simple low fee portfolio.
All you had to do to get it back was nothing.

Earl
michaeljc70
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Re: Borrowing money to invest. Good idea?

Post by michaeljc70 »

Earl Lemongrab wrote:
michaeljc70 wrote:Part of the reason I lost almost 80% of my portfolio in 2007-2009 was leverage. Luckily I gambled on 3X financial ETFs and got my money back plus some. Lesson learned. Now I invest only money I have, keep an emergency fund, and have a simple low fee portfolio.
All you had to do to get it back was nothing.

Earl
Not true. If I had $100, I was down to $20. I would need it to go up 400% to get my $100 back. No broad index is up 400%. And this is 7 years later.
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Earl Lemongrab
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Re: Borrowing money to invest. Good idea?

Post by Earl Lemongrab »

bottlecap wrote:I still don't understand how, if you have the "right resources", paying interest to invest makes sense.
The resources are investments.
Granted, if you have the money you borrow against your home sitting in an FDIC insured bank account, you can pay off the loan if you lose the entire amount and you're not any more "at risk."
That's not the only thing that can be used to make payments.
But save for some very unusual situations that the OP has not described, why would you do this? You are just taking risk with a guaranteed drag on your return.
There is no drag, as everything is fully invested in a diversified portfolio. Remember, you only need to come up with the monthly payment. There's no margin call.

Let's say you have a 70/30 portfolio, 100k in taxable and that much in 401k/Roth combined. The taxable came from a 100k loan at 3.2% for 15 years comprising half the original equity. You'd have a monthly payment of $700.

Suppose there's another 2008 event. The stocks drop 50% and you lose your job plus your house valued drops significantly. Oh noes! There goes the house! Well no. You need $700 each month to service the loan. You sell some stocks at a loss in taxable (tax loss deduction) and rebalance in tax-advantaged to move that figure out of bonds. This barely budges your portfolio. Even if all you had was the 100k, if you had 70/30 you still have bonds you can draw on to make that payment. You can now wait on the market.

No huge cash drag in taxable needed. If the "entire amount" is lost, then there much bigger problems in the country and your house might not be worth anything anyway. If you need to move, you can sell the house even up to half the original value without getting hurt much if at all.

If the loan was more towards 80% of equity, then you're in a tougher situation, but only if you need to sell. Which is also a problem for the 100% equity person. To sell, you take a bath on what you paid. Plus no option for short-sale or letting it go to foreclosure.

Earl
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