Anybody purposely loading up on mortgage debt?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

Taking on new mortgage debt?

Yes, in the past 4 years, I have refinanced, taken significant money out, and put it into my asset allocation
19
10%
No, I have kept my mortgage as is
64
34%
No, I have paid off, or aggressively paid down my mortgage.
106
56%
 
Total votes: 189

Default User BR
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Re: Anybody purposely loading up on mortgage debt?

Post by Default User BR » Wed Feb 06, 2013 5:33 pm

I took out a home-equity loan to refinance my mortgage and take out a bit for investing. However, my available equity is pretty small potatoes compared to the overall portfolio (housing is inexpensive here). Were I a young person, I'd be all over these amazing interest rates.

People here rarely evaluate mortgage debt in a dispassionate manner. Lots about fear and uncertainty and "feel good to be out of debt".


Brian

letsgobobby
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Re: Anybody purposely loading up on mortgage debt?

Post by letsgobobby » Wed Feb 06, 2013 5:56 pm

ResNullius wrote:Debt is a curse, and don't let anyone convince you otherwise.
I don't think you believe this.

So a couple pay off their fine $500,000 house and celebrate with a little party. The next day they both lose their jobs. They have no other savings.

Now what?

zotty
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Re: Anybody purposely loading up on mortgage debt?

Post by zotty » Wed Feb 06, 2013 6:23 pm

If it's important, there is a boglehead wiki for it:

http://www.bogleheads.org/wiki/Asset_protection
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cherijoh
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Re: Anybody purposely loading up on mortgage debt?

Post by cherijoh » Wed Feb 06, 2013 6:25 pm

zotty wrote:It doesn't get mentioned much, but outright home ownership of your family home is one of the best asset protection moves you can make with taxable money.


Zotty must live in one of those states where you can shelter your home (no matter what the value) from creditors.

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Re: Anybody purposely loading up on mortgage debt?

Post by zotty » Wed Feb 06, 2013 6:40 pm

cherijoh wrote:Zotty must live in one of those states where you can shelter your home (no matter what the value) from creditors.


It's true. I do. But.... my home value is nowhere near "no matter what the value". :)

I'd probably be safe anywhere. my house isn't worth that much.
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umfundi
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Re: Anybody purposely loading up on mortgage debt?

Post by umfundi » Wed Feb 06, 2013 6:56 pm

Watty wrote:
umfundi wrote:
LH wrote:Wondering if anyone was currently taking advantage of lowest rates ever, and refinancing mortgage, taking money out, and investing it.


No, but this strikes me as a no brainer:

http://crr.bc.edu/wp-content/uploads/20 ... 10-508.pdf

Take out a $25,000 home equity loan at 3.5% or less. Use the $25,000 to defer Social Security for a year. Next year, use the 8% return from SS to make payments on the home equity loan.

Am I missing something?

Keith


That got me curious so I played with some rough numbers and found a few things;

1) To replace $25,000 in social security and to pay the monthly mortgage payment for the first year you would have to borrow about $26,400.

2) A 30 year fixed rate mortgage for $26,600 would have a mortgage payment of $119 a month

3) A $25,000 from social security a year would be $2,083 a month. An 8% increase would be $167 a month.

4) The different between 167 and 119 is $48 a month, or $576 a year.

5) You would have $25,000 less in home equity and net worth, so the return is only $576 is only 2.3%, but you would also be paying off a small part of the loan each year.

I didn't try to factor in the; the chances of dying in the first year, taxes, or future social security inflation adjustments. I don't see a lot of upside and there are lots of ways that it could turn out badly, like if you had to move.

This is a lot different than if you decided to spend $25,000 out of your retirement savings to delay starting social security for a year.


I'm going to come back to this as possibly an idea for some people. If you cannot afford to delay SS, this is worth considering.

With a low mortgage rate, and SS being indexed to inflation, maybe you can argue the advantage is more than $48 a month.

I'd like to point out that the risk proposition here is totally different than taking cash out of a mortgage to "invest". With the mortgage and Social Security, it's pretty much a choice between two 100% sure scenarios. No stock market risk here. Yes, you may die, but then what do you care?

Let me put it this way: If you are of the appropriate age, taking cash out of a mortgage to invest, while not delaying Social Security, seems very inadvisable to me.

Keith
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Re: Anybody purposely loading up on mortgage debt?

Post by NorCalDad » Wed Feb 06, 2013 7:42 pm

umfundi wrote:Let me put it this way: If you are of the appropriate age, taking cash out of a mortgage to invest, while not delaying Social Security, seems very inadvisable to me.

Along the same lines, isn't this entire calculation going to be different depending on how close you are to retirement? I have 25-30 years left of employment, god willing. I do not see the advantage of paying off my low-interest 30-year mortgage in 10-15 years at the expense of my investments and retirement contributions. If I were 55, I'd feel differently. My risk tolerance would be lower by that point, so mortgage payoff would make more sense.

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Re: Anybody purposely loading up on mortgage debt?

Post by umfundi » Wed Feb 06, 2013 8:00 pm

NorCalDad wrote:
umfundi wrote:Let me put it this way: If you are of the appropriate age, taking cash out of a mortgage to invest, while not delaying Social Security, seems very inadvisable to me.

Along the same lines, isn't this entire calculation going to be different depending on how close you are to retirement? I have 25-30 years left of employment, god willing. I do not see the advantage of paying off my low-interest 30-year mortgage in 10-15 years at the expense of my investments and retirement contributions. If I were 55, I'd feel differently. My risk tolerance would be lower by that point, so mortgage payoff would make more sense.

Absolutely. I think the standard advice is to fill up your tax advantaged space first, then pay student loans, then your mortgage, and taxable investments (beyond an emergency fund) last.

It's interesting to make a list of all of these (there are more than those mentioned) and rank them in priority order. The priority changes (not much) with age and wealth. But it sure is nice to cross things like student loans off your personal list!

Keith
Déjà Vu is not a prediction

TheJoker
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Re: Anybody purposely loading up on mortgage debt?

Post by TheJoker » Mon Apr 17, 2017 12:38 pm

Yes, since I have been averaging a 8% return on my investments, it makes sense for me to borrow at a 4.25 % mortgage rate.

bayview
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Re: Anybody purposely loading up on mortgage debt?

Post by bayview » Tue Apr 18, 2017 7:48 pm

Wow, I wondered why a poll was showing up! :shock: :D

Quite a necro-bump. Welcome to the forums!
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Re: Anybody purposely loading up on mortgage debt?

Post by harvestbook » Tue Apr 18, 2017 8:27 pm

BhamETFs wrote:Yes, since I have been averaging a 8% return on my investments, it makes sense for me to borrow at a 4.25 % mortgage rate.


I would change that to past tense-- "made sense." In truth, you just got lucky. Check back with us after the next crash.
I'm not smart enough to know, and I can't afford to guess.

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Re: Anybody purposely loading up on mortgage debt?

Post by lazydavid » Tue Apr 18, 2017 9:32 pm

Nope. Refinanced late last year from 27 years (of 30 original) at 3.85%, to 15 years at 2.5%. Cut my term almost in half, at the cost of a monthly payment roughly 50% higher. We've agreed that at this rate, we will not be making any additional principal payments, and will let the loan ride out its entire term.

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Re: Anybody purposely loading up on mortgage debt?

Post by aristotelian » Tue Apr 18, 2017 9:43 pm

I did the opposite and cashed out $150K of stocks to pay off our mortgage, just after the Dow had hit 21,000. Short term it was a good move. We will see what happens 10 years from now but I am feeling good about it.

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Re: Anybody purposely loading up on mortgage debt?

Post by willthrill81 » Tue Apr 18, 2017 10:21 pm

riverguy wrote:
grabiner wrote:
riverguy wrote:Seems silly to me unless you are investing in "risk-free" assets trying to capture an interest rate spread. With the 30 year bond (Is lending to the US for 30 years risk free??) at roughly the same interest rate as a 30 yr mortgage, where are you going to find this?


Use the money not going to the mortgage to max out your 401(k) and IRA. You can then lend money to the government at the same rate you borrow from the bank, but you get a tax deduction on the mortgage and don't pay tax on your bond interest (no tax in a Roth, and effectively no tax in a traditional account if you just view the fund as 25% owned by the IRS if you will retire in a 25% tax bracket).


Not even remotely worth the hassle and possible consequences of having the debt, in my opinion. You only end up netting ~25% of the mortgage interest and you are always cashflow negative when you factor in the principal portion of the payment. Get 3% from govt, pay 3% to the bank, get 3% * 25% back from the government. On a $200,000 mortgage that's $1500 in the first year, but you also had to come up with over $4k in principal. Granted this amount will increase as the mortgage is paid down, but the principal portion is still there. To cover the entire payment on a 3% 200k mortgage, you would have to buy a much much larger value of Ts. You are also at the mercy of Washington if the mortgage deduction goes away (like it should).

Plus, if rates were to ever go up, the value of your 30 year Treasurys are going to get torched and the value of your house is getting trashed as well. Not exactly the combination you want for possibly 30 years, especially if you were to lose a job, had to move, etc.

Why would you want to saddle yourself down with unnecessary debt and a mortgage payment to make $1500 a year when the consequences are disastrous if something goes wrong?

Valuethinker wrote:The main thing to understand is that a long term fixed rate debt is an inflation hedge.

When you take out the mortgage, expected inflation is priced into the interest rate.

If inflation exceeds expected inflation, then your 'short' on the fixed income market (see my discussion Nisi's recent post on the 1994 bond market rout) has come good.

If the term of the money is 15 years+ you probably have a pretty good chance it will do better in equities than in your mortgage. Good chance, but not perfect. Particularly if you can invest the money in a tax deferred way.

An important interaction is uncertainty in the labour market/ your labour income. If you think your income might fall, then having a mortgage could be a substantial problem.


I think you are trying to say this, but long term fixed rate debt is only an inflation hedge if your wages rise as well. If your wages aren't rising but the prices of goods you consume are, your mortgage payment becomes an ever growing portion of your income. Look at the past decade. Massive amounts of inflation, mainly in the things we use most, housing and energy, yet wages are flat to down.


+10

I couldn't agree more with everything you said.

It blows me away to hear people say that they won't pay off their mortgage early and will simply invest the extra capital in their AA, which includes bonds. :oops:

And people make too big of a deal about the mortgage interest deduction. That only helps you if you itemize your deductions, and even then, the marginal benefit is only what you itemize above the standard deduction. So if a married couple filing jointly could take a standard deduction of $12,600 or itemize mortgage interest of $20,000, they are only benefiting by $7,400 by itemizing the mortgage interest (assuming that's their only deduction). So instead of getting a 25% break on the interest, you might only be getting a 9% break. And it isn't easy to find a guaranteed tax-free return equivalent to most mortgage rates out there these days.

Job uncertainty for virtually anyone these days is questionable IMHO. Even though I have a three year contract with my employer which will almost certainly lead to an even longer contract after that, I'm still concerned about long-term employment. If I were to suddenly lose my job, you had better believe that I would rather have my house paid off than an equivalent amount of money invested in retirement accounts where I'll get penalized if I access them early and may be forced to sell my equities if they are down as well.

The overwhelming majority of people I've heard who decided to pay off their home early never once regretted it, regardless of the potential returns to be gained by not doing so.

I hope to have mine paid off in fewer than four years.

lazydavid wrote:Nope. Refinanced late last year from 27 years (of 30 original) at 3.85%, to 15 years at 2.5%. Cut my term almost in half, at the cost of a monthly payment roughly 50% higher. We've agreed that at this rate, we will not be making any additional principal payments, and will let the loan ride out its entire term.


That makes sense to me. I don't think that most people who say "I've taken out a 30 year mortgage but will pay it off in 15" have actually done the math on it. A few months ago, I compared the difference on a $100k mortgage balance, and the then higher interest rate on 30 year mortgages would result in $7k more interest being paid over a 15 year repayment period compared to a 15 year mortgage rate. That's a hefty price to pay for the flexibility of being able to 'reduce' your mortgage payment at will.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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whodidntante
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Re: Anybody purposely loading up on mortgage debt?

Post by whodidntante » Tue Apr 18, 2017 10:50 pm

The after tax cost of my mortgage is 2.17%. It's tough to get excited about paying that off. I also have 40 grand borrowed at 1.89% and 20 grand borrowed at 0%.

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Re: Anybody purposely loading up on mortgage debt?

Post by willthrill81 » Tue Apr 18, 2017 10:53 pm

whodidntante wrote:I also have 40 grand borrowed at 1.89% and 20 grand borrowed at 0%.


Might I ask how you borrowed $20k at 0% interest?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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whodidntante
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Re: Anybody purposely loading up on mortgage debt?

Post by whodidntante » Tue Apr 18, 2017 10:58 pm

willthrill81 wrote:
whodidntante wrote:I also have 40 grand borrowed at 1.89% and 20 grand borrowed at 0%.


Might I ask how you borrowed $20k at 0% interest?


Credit card promotional purchase APR. I have high expenses for travel and education, and I can easily spend that much on a card without extra fees.

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Re: Anybody purposely loading up on mortgage debt?

Post by Yeti » Thu Apr 20, 2017 1:40 pm

In late 2012 we sold our home and purchased a new home. In the process, we only put down enough to avoid PMI on the new home leaving us a good chunk of equity in which we invested in our existing asset allocation (80% equities / 20% bonds). Our investments have averaged ~12% gain annually since then.

Did we get lucky? Yes. Would we do it all over? Absolutely. We were in our mid to late 20's in 2012 and we were comfortable using the leverage to increase our exposure in the market. We itemize our deductions which takes our effective interest rate down to ~2.35% (30 year term). With very minimal to no risk you can accomplish this rate of return over 30 years.

Yeti

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Re: Anybody purposely loading up on mortgage debt?

Post by willthrill81 » Thu Apr 20, 2017 1:59 pm

Yeti wrote:In late 2012 we sold our home and purchased a new home. In the process, we only put down enough to avoid PMI on the new home leaving us a good chunk of equity in which we invested in our existing asset allocation (80% equities / 20% bonds). Our investments have averaged ~12% gain annually since then.

Did we get lucky? Yes. Would we do it all over? Absolutely. We were in our mid to late 20's in 2012 and we were comfortable using the leverage to increase our exposure in the market. We itemize our deductions which takes our effective interest rate down to ~2.35% (30 year term). With very minimal to no risk you can accomplish this rate of return over 30 years.

Yeti


I can understand why someone would want to invest in equities rather than paying off their mortgage, but foregoing early repayment of a mortgage in lieu of putting money toward bonds seems fruitless and potentially counterproductive to me.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Anybody purposely loading up on mortgage debt?

Post by Spirit Rider » Thu Apr 20, 2017 2:18 pm

zotty wrote:It doesn't get mentioned much, but outright home ownership of your family home is one of the best asset protection moves you can make with taxable money.

That maybe true in a state with an unlimited homestead exemption. In the vast majority of the country it would be best to keep your equity below you state's homestead exemption. From a purely asset protection point of view it would be best to direct available assets to ERISA protected retirement accounts first.

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Re: Anybody purposely loading up on mortgage debt?

Post by wolf359 » Thu Apr 20, 2017 2:50 pm

willthrill81 wrote:
Yeti wrote:In late 2012 we sold our home and purchased a new home. In the process, we only put down enough to avoid PMI on the new home leaving us a good chunk of equity in which we invested in our existing asset allocation (80% equities / 20% bonds). Our investments have averaged ~12% gain annually since then.

Did we get lucky? Yes. Would we do it all over? Absolutely. We were in our mid to late 20's in 2012 and we were comfortable using the leverage to increase our exposure in the market. We itemize our deductions which takes our effective interest rate down to ~2.35% (30 year term). With very minimal to no risk you can accomplish this rate of return over 30 years.

Yeti


I can understand why someone would want to invest in equities rather than paying off their mortgage, but foregoing early repayment of a mortgage in lieu of putting money toward bonds seems fruitless and potentially counterproductive to me.


I've heard this stated before, but it never made sense to me. Yes, I understand that even my low mortgage (at 3%) costs me more than Total Bond Market's 2.42% SEC Yield. But I don't own bonds for their return. That's what stocks are for.

I own bonds for several reasons:

1) It adds some stability to my portfolio by reducing the risk (volatility).

2) It gives me funds to use for rebalancing if the market drops significantly.

3) It improves my liquidity by providing funds that I can tap without affecting my equity holdings should I need them in a major economic disruption. (Yes, I have an emergency fund as well. But if an emergency is dire enough such that I have exhausted that fund, the taxable account is next in line.) And no, if I'm economically distressed, I'm unable to eat the mortgage. I've also observed banks pulled HELOCs during 2008, so tapping equity that way may or may not be available.)

Paying off my mortgage will reduce my monthly expenses, which is helpful during a financial emergency, but ONLY IF I PAY THE WHOLE THING OFF. During the long time I'm in the process of paying down the mortgage, all I'm doing is reducing my liquidity and my portfolio's stability. Should the markets crash, I can't move mortgage money into the market.

For that matter, the mortgage cost argument is especially true for bank accounts, which pay less than 1%. Would someone state that anybody with a mortgage shouldn't have a savings or checking accounts, or use cash, or emergency funds?

The point is that bonds, cash, and emergency funds have different purposes than a mortgage. Just because I have one doesn't mean it is fruitless or counterproductive to have the others.

What am I missing? Could you explain your position?

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Re: Anybody purposely loading up on mortgage debt?

Post by willthrill81 » Thu Apr 20, 2017 3:26 pm

wolf359 wrote:
willthrill81 wrote:
Yeti wrote:In late 2012 we sold our home and purchased a new home. In the process, we only put down enough to avoid PMI on the new home leaving us a good chunk of equity in which we invested in our existing asset allocation (80% equities / 20% bonds). Our investments have averaged ~12% gain annually since then.

Did we get lucky? Yes. Would we do it all over? Absolutely. We were in our mid to late 20's in 2012 and we were comfortable using the leverage to increase our exposure in the market. We itemize our deductions which takes our effective interest rate down to ~2.35% (30 year term). With very minimal to no risk you can accomplish this rate of return over 30 years.

Yeti


I can understand why someone would want to invest in equities rather than paying off their mortgage, but foregoing early repayment of a mortgage in lieu of putting money toward bonds seems fruitless and potentially counterproductive to me.


I've heard this stated before, but it never made sense to me. Yes, I understand that even my low mortgage (at 3%) costs me more than Total Bond Market's 2.42% SEC Yield. But I don't own bonds for their return. That's what stocks are for.


By that logic, you should use cash or at least TIPS instead of other bonds.

wolf359 wrote:I own bonds for several reasons:

1) It adds some stability to my portfolio by reducing the risk (volatility).


Again, cash or TIPS would reduce the volatility even more than bonds, which are not without their own volatility.

wolf359 wrote:2) It gives me funds to use for rebalancing if the market drops significantly.


This is an oft-cited reason for stock/bond splits, but it's simply false in its stated premise. Vanguard's portfolio models using data going back to 1926 clearly show that a 100% equity portfolio has a higher return than an 80/20 portfolio rebalanced annually. Rebalancing does not improve returns; it merely keeps the desired risk in check. That's another topic though.

wolf359 wrote:3) It improves my liquidity by providing funds that I can tap without affecting my equity holdings should I need them in a major economic disruption. (Yes, I have an emergency fund as well. But if an emergency is dire enough such that I have exhausted that fund, the taxable account is next in line.) And no, if I'm economically distressed, I'm unable to eat the mortgage. I've also observed banks pulled HELOCs during 2008, so tapping equity that way may or may not be available.)


If you have a funded EF, then why do you want to treat a significant portion of your invested assets as an additional EF, especially at the cost of expected loss of return?

wolf359 wrote:Paying off my mortgage will reduce my monthly expenses, which is helpful during a financial emergency, but ONLY IF I PAY THE WHOLE THING OFF. During the long time I'm in the process of paying down the mortgage, all I'm doing is reducing my liquidity and my portfolio's stability.


It's true that you don't get the benefit of no mortgage payment until the mortgage is completely repaid, but you do get the immediate and ongoing benefit of paying less mortgage interest. If you really needed to gain access to that home equity, you could use a HELOC taken out well before the crisis hit. I'm personally considering doing this myself once my mortgage is paid off.

wolf359 wrote:Should the markets crash, I can't move mortgage money into the market.


As noted above, you could if you used a HELOC.

wolf359 wrote:For that matter, the mortgage cost argument is especially true for bank accounts, which pay less than 1%. Would someone state that anybody with a mortgage shouldn't have a savings or checking accounts, or use cash, or emergency funds?


The need for an emergency fund, IMHO and that of many others, trumps the need for returns. This capital should be liquid and easily accessible. But storing additional cash beyond what's needed for an EF could represent a substantial opportunity cost.

wolf359 wrote:The point is that bonds, cash, and emergency funds have different purposes than a mortgage. Just because I have one doesn't mean it is fruitless or counterproductive to have the others.


Essentially, a mortgage is nothing more than a reverse-bond (though mortgage interest is potentially tax deductible whereas bond interest is potentially taxable). I'm not arguing against bonds per se but rather against buying a bond paying an interest rate lower than that of your mortgage. Mathematically, it's hard for doing so to make sense.

Some state that they continue to hold a mortgage as a 'cushion' against hyperinflation, which they can indeed do (for the same reason that hyperinflation destroys bonds' value). But aside from arguably very slim probability of this occurring, it ignores that stocks are a good hedge against inflation as the 1980s clearly demonstrated, plus you will presumably receive dividends as well, which your mortgage doesn't provide.

Holding debt and investing funds elsewhere rarely makes sense unless your expected returns are higher with the alternative. That's simply not the case with most current bonds. Once bond yields eventually improve, the situation may change though.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Anybody purposely loading up on mortgage debt?

Post by villars » Thu Apr 20, 2017 4:01 pm

boknows wrote:
zotty wrote:It doesn't get mentioned much, but outright home ownership of your family home is one of the best asset protection moves you can make with taxable money.


Explain this to me like I'm young and ignorant? :confused

In most states, creditors cannot go after your home. I.e protection against lawsuits

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Re: Anybody purposely loading up on mortgage debt?

Post by NiceUnparticularMan » Thu Apr 20, 2017 4:16 pm

We use a mortgage for leverage, and in fact recently re-financed and took more money out.

But at the moment, we don't invest in nominal long bonds. I agree chasing the spread between your mortgage and nominal long bonds with rates set at the same time usually doesn't make sense.

However, if rates ever go up--then it could make sense to hold onto a mortgage and also invest in nominal long bonds.

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Re: Anybody purposely loading up on mortgage debt?

Post by NiceUnparticularMan » Thu Apr 20, 2017 4:25 pm

willthrill81 wrote:But aside from arguably very slim probability of this occurring, it ignores that stocks are a good hedge against inflation as the 1980s clearly demonstrated, plus you will presumably receive dividends as well, which your mortgage doesn't provide.


I mostly agree with your point about it not making sense to borrow in the form of a mortgage just to go invest in nominal long bonds, provided the rates are set at the same time.

But I wanted to note that stocks are not always a good hedge against unexpected inflation, particularly in the short term, outside of certain relatively narrow boundaries. There are lots of theoretical reasons for this, but the upshot is they are not the perfect unexpectedly high inflation hedge.

A nominal mortgage does have a more automatic response to such scenarios. It is true that doesn't by itself provide dividends, but if you also hold things like cash in money market accounts or other short-term instruments, or have TIPS, or just have a job where wages can rise along with inflation, you are effectively going to end up with improved cash flow as these sources of cash income increase along with inflation while your mortgage payments stay the same.

Again, long bonds taken out during the same prior low rate environment are just going to cancel this effect out, so those don't make sense. But a combination of a nominal mortgage and one of these other income-producing "assets" (including a job with upward wage flexibility) does provide a sort of leveraged insurance against unexpectedly high inflation, and it could be more effective than just stocks.

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Re: Anybody purposely loading up on mortgage debt?

Post by willthrill81 » Thu Apr 20, 2017 4:36 pm

NiceUnparticularMan wrote:
willthrill81 wrote:But aside from arguably very slim probability of this occurring, it ignores that stocks are a good hedge against inflation as the 1980s clearly demonstrated, plus you will presumably receive dividends as well, which your mortgage doesn't provide.


I mostly agree with your point about it not making sense to borrow in the form of a mortgage just to go invest in nominal long bonds, provided the rates are set at the same time.

But I wanted to note that stocks are not always a good hedge against unexpected inflation, particularly in the short term, outside of certain relatively narrow boundaries. There are lots of theoretical reasons for this, but the upshot is they are not the perfect unexpectedly high inflation hedge.


I never said that they were. In the short-term, anything can happen to equities. Attempting to use them for short-term purposes is usually just plain wrong.

NiceUnparticularMan wrote:A nominal mortgage does have a more automatic response to such scenarios. It is true that doesn't by itself provide dividends, but if you also hold things like cash in money market accounts or other short-term instruments, or have TIPS, or just have a job where wages can rise along with inflation, you are effectively going to end up with improved cash flow as these sources of cash income increase along with inflation while your mortgage payments stay the same.


Many who've lived through periods of high inflation can attest that their wages often do not keep pace. That can put you in a hard place quickly.

NiceUnparticularMan wrote:Again, long bonds taken out during the same prior low rate environment are just going to cancel this effect out, so those don't make sense. But a combination of a nominal mortgage and one of these other income-producing "assets" (including a job with upward wage flexibility) does provide a sort of leveraged insurance against unexpectedly high inflation, and it could be more effective than just stocks.


Emphasis should be placed on "could." There is no panacea to high inflation, especially when it's unexpected.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Anybody purposely loading up on mortgage debt?

Post by wolf359 » Thu Apr 20, 2017 6:35 pm

willthrill81 wrote:
wolf359 wrote:
willthrill81 wrote:
I can understand why someone would want to invest in equities rather than paying off their mortgage, but foregoing early repayment of a mortgage in lieu of putting money toward bonds seems fruitless and potentially counterproductive to me.


I've heard this stated before, but it never made sense to me. Yes, I understand that even my low mortgage (at 3%) costs me more than Total Bond Market's 2.42% SEC Yield. But I don't own bonds for their return. That's what stocks are for.


By that logic, you should use cash or at least TIPS instead of other bonds.

wolf359 wrote:I own bonds for several reasons:

1) It adds some stability to my portfolio by reducing the risk (volatility).


Again, cash or TIPS would reduce the volatility even more than bonds, which are not without their own volatility.

wolf359 wrote:2) It gives me funds to use for rebalancing if the market drops significantly.


This is an oft-cited reason for stock/bond splits, but it's simply false in its stated premise. Vanguard's portfolio models using data going back to 1926 clearly show that a 100% equity portfolio has a higher return than an 80/20 portfolio rebalanced annually. Rebalancing does not improve returns; it merely keeps the desired risk in check. That's another topic though.

wolf359 wrote:3) It improves my liquidity by providing funds that I can tap without affecting my equity holdings should I need them in a major economic disruption. (Yes, I have an emergency fund as well. But if an emergency is dire enough such that I have exhausted that fund, the taxable account is next in line.) And no, if I'm economically distressed, I'm unable to eat the mortgage. I've also observed banks pulled HELOCs during 2008, so tapping equity that way may or may not be available.)


If you have a funded EF, then why do you want to treat a significant portion of your invested assets as an additional EF, especially at the cost of expected loss of return?

wolf359 wrote:Paying off my mortgage will reduce my monthly expenses, which is helpful during a financial emergency, but ONLY IF I PAY THE WHOLE THING OFF. During the long time I'm in the process of paying down the mortgage, all I'm doing is reducing my liquidity and my portfolio's stability.


It's true that you don't get the benefit of no mortgage payment until the mortgage is completely repaid, but you do get the immediate and ongoing benefit of paying less mortgage interest. If you really needed to gain access to that home equity, you could use a HELOC taken out well before the crisis hit. I'm personally considering doing this myself once my mortgage is paid off.

wolf359 wrote:Should the markets crash, I can't move mortgage money into the market.


As noted above, you could if you used a HELOC.

wolf359 wrote:For that matter, the mortgage cost argument is especially true for bank accounts, which pay less than 1%. Would someone state that anybody with a mortgage shouldn't have a savings or checking accounts, or use cash, or emergency funds?


The need for an emergency fund, IMHO and that of many others, trumps the need for returns. This capital should be liquid and easily accessible. But storing additional cash beyond what's needed for an EF could represent a substantial opportunity cost.

wolf359 wrote:The point is that bonds, cash, and emergency funds have different purposes than a mortgage. Just because I have one doesn't mean it is fruitless or counterproductive to have the others.


Essentially, a mortgage is nothing more than a reverse-bond (though mortgage interest is potentially tax deductible whereas bond interest is potentially taxable). I'm not arguing against bonds per se but rather against buying a bond paying an interest rate lower than that of your mortgage. Mathematically, it's hard for doing so to make sense.


On the one hand, you're suggest replacing bonds with low-interest cash. Then you argue that bonds are bad because they pay a lower interest than your mortgage. This is inconsistent. In any case, the bonds are currently yielding 2.42%, compared to a mortgage of 3%. The difference in yield is small, and over a long holding period, as interest rates increase, will disappear. The point of using bonds instead of cash is that cash has practically no yield, but bonds are at least close to that of the mortgage rate.

You try to address the liquidity issue with using a HELOC to tap the equity in the home, but don't address the issue that during the financial crisis, many people had their HELOCs cancelled. (Although I used a generic specific case, here are some examples that this was in fact a general problem http://money.cnn.com/2008/04/18/real_es ... /index.htm). Lack of liquidity is a bigger issue than chasing a .5% return on a small portion of your portfolio.

Having a fully funded emergency fund doesn't mean that extraordinary events can't happen that can exceed that emergency fund. If you are facing a Great Depression-type economy where everyone in your household is unemployed, your stocks have been cut to 82% of their value, the market doesn't recover for 22 years, and your HELOC has been cancelled, what do you do for money? After exhausting your other funds and cutting back, you'll probably start selling your taxable accounts, then your retirement funds. It's a last resort, not the primary plan. If there was a high risk of this occurring, my emergency fund would be bigger.

How exactly does this "no bonds if you have a mortgage" position work? If your mortgage is $100,000, and you normally hold $200,000 in bonds, would that mean you would hold no bonds, or $100,000 in bonds? Being 100/0 for 30 years just because you have a mortgage that long sounds extreme.

Finally, why are you focusing on one single asset class (bonds)? You should look at the total return of your portfolio. If you feel that you can beat a 3% mortgage cost with your total portfolio, then investing makes sense. The only time it doesn't make sense is if you're planning on holding only, or mostly bonds (such that your return is below 3%.)

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Re: Anybody purposely loading up on mortgage debt?

Post by willthrill81 » Thu Apr 20, 2017 7:03 pm

wolf359 wrote:On the one hand, you're suggest replacing bonds with low-interest cash. Then you argue that bonds are bad because they pay a lower interest than your mortgage. This is inconsistent.


Please reread what I said. I said that cash and TIPS are a better way to reduce volatility than bonds if that is your goal.

wolf359 wrote:In any case, the bonds are currently yielding 2.42%, compared to a mortgage of 3%. The difference in yield is small, and over a long holding period, as interest rates increase, will disappear. The point of using bonds instead of cash is that cash has practically no yield, but bonds are at least close to that of the mortgage rate.


When it comes to returns, bonds certainly beat cash, but stocks also beat bonds in the long-term. But you said that you didn't hold bonds for their return, so I'm not sure why you're bringing this up now.

wolf359 wrote:You try to address the liquidity issue with using a HELOC to tap the equity in the home, but don't address the issue that during the financial crisis, many people had their HELOCs cancelled. (Although I used a generic specific case, here are some examples that this was in fact a general problem http://money.cnn.com/2008/04/18/real_es ... /index.htm). Lack of liquidity is a bigger issue than chasing a .5% return on a small portion of your portfolio.


That's a fair point. If you're willing to pay .5% in order to maintain liquidity, then by all means do so.

wolf359 wrote:Having a fully funded emergency fund doesn't mean that extraordinary events can't happen that can exceed that emergency fund. If you are facing a Great Depression-type economy where everyone in your household is unemployed, your stocks have been cut to 82% of their value, the market doesn't recover for 22 years, and your HELOC has been cancelled, what do you do for money? After exhausting your other funds and cutting back, you'll probably start selling your taxable accounts, then your retirement funds. It's a last resort, not the primary plan. If there was a high risk of this occurring, my emergency fund would be bigger.


All roads carry risk, hence my quote below. If Great Depression 2 happens, I can pretty much guarantee that you would rather have no mortgage that could be foreclosed than bonds which might have lost their value; in a true economic crisis, bonds aren't necessarily secure, even Treasuries. Many of those who were negatively impacted by Great Depression 1 experienced that as a result of mortgage debt. You might be able to use your bonds to repay your mortgage, but you might not for any number of reasons. But a paid-off mortgage is a guarantee, and those are fairly seldom in the world of finance.

That being said, you're note alone in this view. A few others advocate treating your investment portfolio like a big emergency fund and maintaining an AA appropriate for the 'withdrawal' phase even if you plan on not withdrawing from it for decades. I do not subscribe to that view, but that's why it's called personal finance.

wolf359 wrote:How exactly does this "no bonds if you have a mortgage" position work? If your mortgage is $100,000, and you normally hold $200,000 in bonds, would that mean you would hold no bonds, or $100,000 in bonds? Being 100/0 for 30 years just because you have a mortgage that long sounds extreme.


It could indeed get complicated if you let it, but when bond yields are at or below the rate of your mortgage, you could simply not buy any more bonds and put that money on your mortgage instead. If you can't realistically access capital already allocated to bonds (i.e. held in a tax-deferred account, would adversely impact tax situation), then leave that money where it is. But if you can access said capital easily, I would argue that it makes sense to pay down (or off) the mortgage.

wolf359 wrote:Finally, why are you focusing on one single asset class (bonds)? You should look at the total return of your portfolio. If you feel that you can beat a 3% mortgage cost with your total portfolio, then investing makes sense. The only time it doesn't make sense is if you're planning on holding only, or mostly bonds (such that your return is below 3%.)


The expected long-term return (10 years or longer) of most equities is far greater than current mortgage rates, so it makes sense on one level to invest in equities instead of paying off a mortgage. But the same cannot be said of bonds at current yields. If/when yields move up, then the situation changes. This is true whether we're talking about bonds, money markets, CDs, or anything else.

Let me reiterate that I'm not against bonds per se. They can certainly have their place in a good AA. But favoring bonds at current yields over paying down a higher rate mortgage simply doesn't make mathematical sense. If it makes you feel more comfortable and you want the liquidity this may offer, then it may make perfect sense for you.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Anybody purposely loading up on mortgage debt?

Post by NiceUnparticularMan » Thu Apr 20, 2017 7:08 pm

willthrill81 wrote:I never said that they were. In the short-term, anything can happen to equities. Attempting to use them for short-term purposes is usually just plain wrong.


So there you go. For example, it took a LONG time for stocks to catch up with the unexpectedly high inflation of the late 1960s through 1970s. You might reasonably want an alternative.

Many who've lived through periods of high inflation can attest that their wages often do not keep pace. That can put you in a hard place quickly.


It certainly depends on the job. But again to use the 1970s as an example, on average real hourly wages increased in the 1970s despite high inflation rates. Ultimately, you really can't have sustained high inflation without wages in general keeping up.

And of course even if your wages only partially respond to inflation, your mortgage payments as a percentage of wages will still be going down.

Emphasis should be placed on "could." There is no panacea to high inflation, especially when it's unexpected.


I don't know if I would call it a "panacea," but some anti-unexpected-inflation measures are more predictable than others. And the fact the real value of nominal mortgage payments will decline is about as predictable as it gets.

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Re: Anybody purposely loading up on mortgage debt?

Post by wolf359 » Fri Apr 21, 2017 10:30 am

Willthrill,

Let's try this again.

Let's say you have a $100,000 30 year fixed mortgage at 3% interest, and you have a $100,000 taxable portfolio with an asset allocation of 80% stocks and 20% bonds. Let's further say that you are adding $1,000/mo to this portfolio, and that you consider the mortgage to be affordable (or you wouldn't have an additional $1K excess for savings.

If I understand you correctly, you would reduce the portfolio to $80,000, use the bonds to pay down the mortgage, and use the future savings stream of $1,000/mo to add $800 to the portfolio and $200 to mortgage paydown.

Clearly, you could use the entire portfolio and pay off the mortgage. But then you have NO liquidity, and have to rebuild the portfolio over the next 4-5 years. But you're not arguing for NO mortgage. You're just arguing for NO bonds while you have a mortgage.

I still don't understand the case for dropping bonds in favor of paying down a low-interest mortgage (while keeping the mortgage in place). I DO agree with paying off a HIGH INTEREST mortgage, but that's not the case here. I stated the reasons I would use bonds, and you argued against those. But you focused on my reasons, and didn't make your case.

1) Blending bonds with stocks will reduce the portfolio's overall volatility. How will paying down the mortgage reduce the portfolio's volatility?

2) Bonds could be used to rebalance if the market drops significantly. How will paying down (not off) the mortgage provide funds for investing in a downturn. Although a HELOC could be used, isn't that effectively a second mortgage at higher interest rates if you use it?

3) Bonds improves my liquidity by providing funds that I can tap without affecting my equity holdings should I need them in a major economic disruption. The idea is that if you become desperate enough to tap your account, that you can hit your bonds first. I'm never said you should have a retirement-level bond allocation throughout your accumulation years. If you have a simple 80/20 AA, that 20% bond position provides that much more of a buffer before you have to start tapping the equities. This type of scenario would require a big enough economic disruption to overcome a fully funded emergency fund. 2008 did it for some people, and HELOCs were getting pulled from people then. Paying down a mortgage decreases your liquidity.

Holding debt and investing funds elsewhere rarely makes sense unless your expected returns are higher with the alternative. That's simply not the case with most current bonds. Once bond yields eventually improve, the situation may change though.


If you believe stocks return better than a 3% mortgage, then why are you talking about bonds at all? Why not just argue that everybody should be 100% stocks for the 30 years they hold a mortgage, and never pay it down?

The point is, that some people need risk-adjusted portfolios, and a stock/bond blend will still return greater than 3% risk-adjusted returns. It makes no sense to argue against one specific asset class based solely on returns, especially when no one is arguing for a 0/100 total bond portfolio on the other side.

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Re: Anybody purposely loading up on mortgage debt?

Post by NiceUnparticularMan » Fri Apr 21, 2017 10:56 am

wolf359 wrote:1) Blending bonds with stocks will reduce the portfolio's overall volatility. How will paying down the mortgage reduce the portfolio's volatility?


Just my two cents, but if you were tracking the present value of the mortgage using prevailing interest rates and including that as part of your "portfolio," changes in that value are going to be offsetting your similar long bond's present value. Once you did that, you would find your portfolio value was more volatile than you thought. And then you would further find that paying down the mortgage would reduce volatility, because it would decrease that offset of your bonds.

This is true even without bonds too--if you account for the mortgage you are making a leveraged investment in stocks. This increases the volatility of the portfolio (if you properly account for the mortgage), and by paying down the mortgage you decrease your leverage and decrease your portfolio's volatility.

Typically people just ignore all this and don't account for their mortgage in their portfolio. Whether that makes sense or not depends on why you care about portfolio volatility, but there is a good case for caring to the extent it is income/consumption scenarios motivating your concern. Speaking of which . . . .

3) Bonds improves my liquidity by providing funds that I can tap without affecting my equity holdings should I need them in a major economic disruption. The idea is that if you become desperate enough to tap your account, that you can hit your bonds first. I'm never said you should have a retirement-level bond allocation throughout your accumulation years. If you have a simple 80/20 AA, that 20% bond position provides that much more of a buffer before you have to start tapping the equities. This type of scenario would require a big enough economic disruption to overcome a fully funded emergency fund. 2008 did it for some people, and HELOCs were getting pulled from people then. Paying down a mortgage decreases your liquidity.


So the cash for making your mortgage payments is coming from somewhere. If you don't have a mortgage, now you can use that cash flow for other things. I think that is what is missing from the claim that paying down a mortgage decreases your liquidity--that is overlooking the financial flexibility you get from having that cash flow available for other spending.

Or to put it the other way: to avoid defaulting on your mortgage, you will need more monthly cash flow in the event of an emergency. So if the bonds in your long-term portfolio are serving as a deep emergency fund, you need more of them to offset this higher monthly cash flow requirement. But if you eliminate the mortgage, you need less of them.

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Re: Anybody purposely loading up on mortgage debt?

Post by willthrill81 » Fri Apr 21, 2017 11:03 am

wolf359 wrote:Willthrill,

Let's try this again.

Let's say you have a $100,000 30 year fixed mortgage at 3% interest, and you have a $100,000 taxable portfolio with an asset allocation of 80% stocks and 20% bonds. Let's further say that you are adding $1,000/mo to this portfolio, and that you consider the mortgage to be affordable (or you wouldn't have an additional $1K excess for savings.

If I understand you correctly, you would reduce the portfolio to $80,000, use the bonds to pay down the mortgage, and use the future savings stream of $1,000/mo to add $800 to the portfolio and $200 to mortgage paydown.

Clearly, you could use the entire portfolio and pay off the mortgage. But then you have NO liquidity, and have to rebuild the portfolio over the next 4-5 years. But you're not arguing for NO mortgage. You're just arguing for NO bonds while you have a mortgage.


At current yields for most bonds, that's right.

wolf359 wrote:I still don't understand the case for dropping bonds in favor of paying down a low-interest mortgage (while keeping the mortgage in place). I DO agree with paying off a HIGH INTEREST mortgage, but that's not the case here. I stated the reasons I would use bonds, and you argued against those. But you focused on my reasons, and didn't make your case.

1) Blending bonds with stocks will reduce the portfolio's overall volatility. How will paying down the mortgage reduce the portfolio's volatility?


If all you're doing is looking at your investment portfolio (i.e. excluding your home equity from the equation), your volatility will not be reduced by paying down your mortgage. But if you do include your home equity in your calculations, then paying down your mortgage will reduce your total volatility.

wolf359 wrote:2) Bonds could be used to rebalance if the market drops significantly. How will paying down (not off) the mortgage provide funds for investing in a downturn. Although a HELOC could be used, isn't that effectively a second mortgage at higher interest rates if you use it?


Again, the idea that rebalancing in a stock market downturn will somehow beat a 100% equity portfolio is simply false. There is no 'rebalancing premium'. Vanguard's data (please see the site below) shows this very well.

https://personal.vanguard.com/us/insigh ... llocations

wolf359 wrote:3) Bonds improves my liquidity by providing funds that I can tap without affecting my equity holdings should I need them in a major economic disruption. The idea is that if you become desperate enough to tap your account, that you can hit your bonds first. I'm never said you should have a retirement-level bond allocation throughout your accumulation years. If you have a simple 80/20 AA, that 20% bond position provides that much more of a buffer before you have to start tapping the equities. This type of scenario would require a big enough economic disruption to overcome a fully funded emergency fund. 2008 did it for some people, and HELOCs were getting pulled from people then. Paying down a mortgage decreases your liquidity.


As I already said, there's a fair point to be made that investing in low yield bonds does indeed improve your liquidity. But you cannot gloss over the fact that at current bond yields, you are literally paying for that liquidity. For instance, if your mortgage rate is 4% (many are) and bond yields are 2.5%, then you are 'losing' 1.5% every year by holding the bonds instead of using that money to pay down your mortgage. If you are willing to pay that price for liquidity, then by all means do so. Just don't act like it isn't costing you money because it is.

wolf359 wrote:If you believe stocks return better than a 3% mortgage, then why are you talking about bonds at all? Why not just argue that everybody should be 100% stocks for the 30 years they hold a mortgage, and never pay it down?


I've never advocated that. I'm saying that mathematically, it's preferable to pay down your mortgage if the after-tax rate is higher than the yield of the bonds you are buying, which is true for most people, though certainly not all.

wolf359 wrote:The point is, that some people need risk-adjusted portfolios, and a stock/bond blend will still return greater than 3% risk-adjusted returns. It makes no sense to argue against one specific asset class based solely on returns, especially when no one is arguing for a 0/100 total bond portfolio on the other side.


You are still missing the total picture.

Let's say that someone has $100,000 of stocks, $100,000 of bonds, and a $100,000 mortgage balance. What is that person's real AA? If he is only looking at his investment portfolio, he would say 50% stocks and 50% bonds. But if he is looking at the whole situation, he is 33% stocks and 67% bonds. And with regard to those bonds (both positive ['plain' bonds] and negative [mortgage]), he is potentially borrowing $100,000 at 4% interest only to reinvest it at 2.5% (approximately at current yields). Let's say that he doesn't like that negative arbitrage deal and uses the $100,000 in 'plain' bonds to pay off the $100,000 mortgage balance. While he no longer holds bonds, he now has $100,000 of home equity that he didn't have before. And while that isn't directly generating an income, it's saving him 4% a year, which amounts to the same thing from a strict mathematical standpoint.

If you only consider your invested assets as part of your AA, you'll lose sight of this.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Anybody purposely loading up on mortgage debt?

Post by willthrill81 » Fri Apr 21, 2017 11:04 am

NiceUnparticularMan wrote:
wolf359 wrote:1) Blending bonds with stocks will reduce the portfolio's overall volatility. How will paying down the mortgage reduce the portfolio's volatility?


Just my two cents, but if you were tracking the present value of the mortgage using prevailing interest rates and including that as part of your "portfolio," changes in that value are going to be offsetting your similar long bond's present value. Once you did that, you would find your portfolio value was more volatile than you thought. And then you would further find that paying down the mortgage would reduce volatility, because it would decrease that offset of your bonds.

This is true even without bonds too--if you account for the mortgage you are making a leveraged investment in stocks. This increases the volatility of the portfolio (if you properly account for the mortgage), and by paying down the mortgage you decrease your leverage and decrease your portfolio's volatility.

Typically people just ignore all this and don't account for their mortgage in their portfolio. Whether that makes sense or not depends on why you care about portfolio volatility, but there is a good case for caring to the extent it is income/consumption scenarios motivating your concern. Speaking of which . . . .

3) Bonds improves my liquidity by providing funds that I can tap without affecting my equity holdings should I need them in a major economic disruption. The idea is that if you become desperate enough to tap your account, that you can hit your bonds first. I'm never said you should have a retirement-level bond allocation throughout your accumulation years. If you have a simple 80/20 AA, that 20% bond position provides that much more of a buffer before you have to start tapping the equities. This type of scenario would require a big enough economic disruption to overcome a fully funded emergency fund. 2008 did it for some people, and HELOCs were getting pulled from people then. Paying down a mortgage decreases your liquidity.


So the cash for making your mortgage payments is coming from somewhere. If you don't have a mortgage, now you can use that cash flow for other things. I think that is what is missing from the claim that paying down a mortgage decreases your liquidity--that is overlooking the financial flexibility you get from having that cash flow available for other spending.

Or to put it the other way: to avoid defaulting on your mortgage, you will need more monthly cash flow in the event of an emergency. So if the bonds in your long-term portfolio are serving as a deep emergency fund, you need more of them to offset this higher monthly cash flow requirement. But if you eliminate the mortgage, you need less of them.


Precisely. :beer
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Anybody purposely loading up on mortgage debt?

Post by NiceUnparticularMan » Fri Apr 21, 2017 11:07 am

willthrill81 wrote:Let's say that someone has $100,000 of stocks, $100,000 of bonds, and a $100,000 mortgage balance. What is that person's real AA? If he is only looking at his investment portfolio, he would say 50% stocks and 50% bonds. But if he is looking at the whole situation, he is 33% stocks and 67% bonds.


I'd actually say they are approximately 100% stocks.

I borrow $100,000 from Person A, then loan it to Person B. If the terms are about the same, then how have I changed my financial situation? Not much, if at all.

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Re: Anybody purposely loading up on mortgage debt?

Post by willthrill81 » Fri Apr 21, 2017 11:14 am

NiceUnparticularMan wrote:
willthrill81 wrote:Let's say that someone has $100,000 of stocks, $100,000 of bonds, and a $100,000 mortgage balance. What is that person's real AA? If he is only looking at his investment portfolio, he would say 50% stocks and 50% bonds. But if he is looking at the whole situation, he is 33% stocks and 67% bonds.


I'd actually say they are approximately 100% stocks.

I borrow $100,000 from Person A, then loan it to Person B. If the terms are about the same, then how have I changed my financial situation? Not much, if at all.


That's arguable, but I definitely see your point.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Anybody purposely loading up on mortgage debt?

Post by Theoretical » Fri Apr 21, 2017 11:28 am

NiceUnparticularMan wrote:
willthrill81 wrote:Let's say that someone has $100,000 of stocks, $100,000 of bonds, and a $100,000 mortgage balance. What is that person's real AA? If he is only looking at his investment portfolio, he would say 50% stocks and 50% bonds. But if he is looking at the whole situation, he is 33% stocks and 67% bonds.


I'd actually say they are approximately 100% stocks.

I borrow $100,000 from Person A, then loan it to Person B. If the terms are about the same, then how have I changed my financial situation? Not much, if at all.


I would say it's a 1.5X leveraged 50/50 portfolio doing the opposite side of the bank trade (borrow short and lend long). In this case it's borrow long term at a fixed rate and invest 50% in stocks and 50% in bonds of X duration. He's definitely NOT 33/67 stocks/bonds.

Now if you're doing nothing but investing 50% in stocks and 50% in GNMAs or other MBSs, then the strategy is very confusing and more directly offsetting.

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Re: Anybody purposely loading up on mortgage debt?

Post by willthrill81 » Fri Apr 21, 2017 11:33 am

Theoretical wrote:I would say it's a 1.5X leveraged 50/50 portfolio doing the opposite side of the bank trade (borrow short and lend long). In this case it's borrow long term at a fixed rate and invest 50% in stocks and 50% in bonds of X duration. He's definitely NOT 33/67 stocks/bonds.

Now if you're doing nothing but investing 50% in stocks and 50% in GNMAs or other MBSs, then the strategy is very confusing and more directly offsetting.


As you say, it can get confusing, but I have already conceded my mistake there.

The real point remains that borrowing money at 4% to lend it at 2.5% is a losing game.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Anybody purposely loading up on mortgage debt?

Post by John Doe 123 » Fri Apr 21, 2017 11:36 am

I can't believe there are multiple people arguing in favor of a bond holding in a taxable account that pays less interest than their mortgage rate.

Will, some men you just can't reach. :sharebeer

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Re: Anybody purposely loading up on mortgage debt?

Post by wolf359 » Fri Apr 21, 2017 1:17 pm

NiceUnparticularMan wrote:
wolf359 wrote:1) Blending bonds with stocks will reduce the portfolio's overall volatility. How will paying down the mortgage reduce the portfolio's volatility?


Just my two cents, but if you were tracking the present value of the mortgage using prevailing interest rates and including that as part of your "portfolio," changes in that value are going to be offsetting your similar long bond's present value. Once you did that, you would find your portfolio value was more volatile than you thought. And then you would further find that paying down the mortgage would reduce volatility, because it would decrease that offset of your bonds.

This is true even without bonds too--if you account for the mortgage you are making a leveraged investment in stocks. This increases the volatility of the portfolio (if you properly account for the mortgage), and by paying down the mortgage you decrease your leverage and decrease your portfolio's volatility.

Typically people just ignore all this and don't account for their mortgage in their portfolio. Whether that makes sense or not depends on why you care about portfolio volatility, but there is a good case for caring to the extent it is income/consumption scenarios motivating your concern.


My home is a consumption item, not an investment. It does tie up a large amount of my capital, but I don't track it on a daily basis. It makes no sense to do so. If it doubles in value, or cuts in half, I can't sell it if I'm going to continue living there. Treating it as a consumption item, I want to minimize its expense. Over time, I expect it to hold its value against inflation, but no more. So far, every house I've ever bought has done exactly that. When adjusted against inflation, it's the same.

If I weren't owning, I'd be renting. I have to live somewhere. The main benefit of owning is that I get to fix my housing expenses. But still not an investment, and therefore not part of the portfolio.

3) Bonds improves my liquidity by providing funds that I can tap without affecting my equity holdings should I need them in a major economic disruption. The idea is that if you become desperate enough to tap your account, that you can hit your bonds first. I'm never said you should have a retirement-level bond allocation throughout your accumulation years. If you have a simple 80/20 AA, that 20% bond position provides that much more of a buffer before you have to start tapping the equities. This type of scenario would require a big enough economic disruption to overcome a fully funded emergency fund. 2008 did it for some people, and HELOCs were getting pulled from people then. Paying down a mortgage decreases your liquidity.


So the cash for making your mortgage payments is coming from somewhere. If you don't have a mortgage, now you can use that cash flow for other things. I think that is what is missing from the claim that paying down a mortgage decreases your liquidity--that is overlooking the financial flexibility you get from having that cash flow available for other spending.

Or to put it the other way: to avoid defaulting on your mortgage, you will need more monthly cash flow in the event of an emergency. So if the bonds in your long-term portfolio are serving as a deep emergency fund, you need more of them to offset this higher monthly cash flow requirement. But if you eliminate the mortgage, you need less of them.


I agree that PAYING OFF the mortgage increases your monthly cash flow. WillThrill is arguing the case that PAYING IT DOWN instead of holding any bonds is the way to go. If you've simply paid it down, then you still owe mortgage payments. Now you have less money in your investment account, more money in your home equity, and you still have a mortgage payment to meet. Hence, less liquidity.

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Re: Anybody purposely loading up on mortgage debt?

Post by NiceUnparticularMan » Fri Apr 21, 2017 1:42 pm

Theoretical wrote:
NiceUnparticularMan wrote:
willthrill81 wrote:Let's say that someone has $100,000 of stocks, $100,000 of bonds, and a $100,000 mortgage balance. What is that person's real AA? If he is only looking at his investment portfolio, he would say 50% stocks and 50% bonds. But if he is looking at the whole situation, he is 33% stocks and 67% bonds.


I'd actually say they are approximately 100% stocks.

I borrow $100,000 from Person A, then loan it to Person B. If the terms are about the same, then how have I changed my financial situation? Not much, if at all.


I would say it's a 1.5X leveraged 50/50 portfolio doing the opposite side of the bank trade (borrow short and lend long). In this case it's borrow long term at a fixed rate and invest 50% in stocks and 50% in bonds of X duration. He's definitely NOT 33/67 stocks/bonds.

Now if you're doing nothing but investing 50% in stocks and 50% in GNMAs or other MBSs, then the strategy is very confusing and more directly offsetting.


Right, in the hypothetical the terms are the same. If they are not the same, then you can't just offset them in the way I suggested. Which might make sense, actually, and in fact I am doing that myself (i have a mortgage and short-term fixed, which is not just offsetting).

But when thinking big picture about AA and getting down to two numbers, people are lumping all fixed together and treating them as one thing. That's not necessarily the exact "right" answer, but if you do that, then I think at that high level of approximation, your mortgage is in fact cancelling out your fixed allocation, not adding to it.

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Re: Anybody purposely loading up on mortgage debt?

Post by NiceUnparticularMan » Fri Apr 21, 2017 2:05 pm

wolf359 wrote:My home is a consumption item, not an investment.


I was talking about valuing your mortgage, not your home. Your home secures your mortgage, but your mortgage is a financial instrument, and it can in fact be reduced to present value, and in fact banks do that calculation all the time as they sell mortgages to each other.

I agree that PAYING OFF the mortgage increases your monthly cash flow. WillThrill is arguing the case that PAYING IT DOWN instead of holding any bonds is the way to go. If you've simply paid it down, then you still owe mortgage payments. Now you have less money in your investment account, more money in your home equity, and you still have a mortgage payment to meet. Hence, less liquidity.


That's a timing issue based on the way mortgages are amortized. You are in fact freeing up cash flow by paying down the mortgage early, but not immediately.

To alter that timing, there are several things you can potentially do. A HELOC is basically a way of moving that money back into the present as needed, but I understand there might be some risk of it being cancelled.

However, you can also just change your bond mix to move forward cash flow. If, say, paying down your mortgage reduced your payoff date from 20 years to 10 years, you could trim out bond payments that are scheduled to come to you after 10 years, and re-invest the proceeds in bond payments scheduled to come to you within 10 years. Again, your mortgage was effectively just offsetting those longer bonds in the first place, so with this measure you are basically just undoing the amortization of your mortgage.

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Re: Anybody purposely loading up on mortgage debt?

Post by willthrill81 » Fri Apr 21, 2017 2:16 pm

wolf359 wrote:My home is a consumption item, not an investment.


Actually, your home is absolutely a very real investment for the reason you state yourself below.

wolf359 wrote:If I weren't owning, I'd be renting. I have to live somewhere.


So if you didn't own your home, you would have to be paying rent. So by owning your home, you are literally saving that rent payment (minus property taxes and insurance) every month. For instance, if you could either pay $200,000 for a home or pay $1,200 a month in rent, then your home is effectively earning you 7.2% annually (minus the property taxes and structural insurance incorporated into the rent payment).

wolf359 wrote:I agree that PAYING OFF the mortgage increases your monthly cash flow. WillThrill is arguing the case that PAYING IT DOWN instead of holding any bonds is the way to go. If you've simply paid it down, then you still owe mortgage payments. Now you have less money in your investment account, more money in your home equity, and you still have a mortgage payment to meet. Hence, less liquidity.


You're absolutely right.

I'll say it for the third time: paying down your mortgage without paying it off does reduce your liquidity. But in the case of current bond yields, that liquidity is literally costing you guaranteed returns in the form of more mortgage interest. If you would rather have the liquidity and pay the price for it, then do it. But the price you pay for it is very real.
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Re: Anybody purposely loading up on mortgage debt?

Post by staythecourse » Fri Apr 21, 2017 2:22 pm

Nothing to add, but an attempt to deviate the thread...

The thread was originally posted by "LH". Got me thinking I haven't seen the poster for awhile. Anyone know what happened to LH? I enjoyed their posts.

Good luck.
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Re: Anybody purposely loading up on mortgage debt?

Post by wolf359 » Fri Apr 21, 2017 2:36 pm

willthrill81 wrote:
You are still missing the total picture.

Let's say that someone has $100,000 of stocks, $100,000 of bonds, and a $100,000 mortgage balance. What is that person's real AA? If he is only looking at his investment portfolio, he would say 50% stocks and 50% bonds. But if he is looking at the whole situation, he is 33% stocks and 67% bonds. And with regard to those bonds (both positive ['plain' bonds] and negative [mortgage]), he is potentially borrowing $100,000 at 4% interest only to reinvest it at 2.5% (approximately at current yields). Let's say that he doesn't like that negative arbitrage deal and uses the $100,000 in 'plain' bonds to pay off the $100,000 mortgage balance. While he no longer holds bonds, he now has $100,000 of home equity that he didn't have before. And while that isn't directly generating an income, it's saving him 4% a year, which amounts to the same thing from a strict mathematical standpoint.

If you only consider your invested assets as part of your AA, you'll lose sight of this.


Okay, I get this point. Paying off a mortgage saves you money. I think I stated that up front.

But you're saying that NOT paying off the mortgage is also beneficial, and I don't see that point. What if his mortgage balance was $300,000? (Let's say that our hypothetical investor doesn't have enough money in taxable to pay off the mortgage outright.)

Using $100,000 in bonds to pay down the mortgage balance still leaves him with $200,000 to go. His net worth didn't change, since his $100,000 worth of bonds simply moved to $100,000 worth of home equity. His liquidity DEFINITELY changed -- it was cut in half.

Now, let's have the economy tank, so the stock market cuts in half, and he loses his job. His portfolio is now down to $50,000, and he's in danger of losing his house if he runs through his emergency fund and has to start tapping his equities. If he reaches that point, he's selling them when they're down.

If he had kept his bonds, then he still has a portfolio of $150,000. That gives him a lot more time to find a new job.

Liquidity is valuable. Paying down a mortgage costs liquidity.

I also noticed that you changed the cost of the mortgage from 3% to 4%. What if it actually was a low-cost mortgage, such as 3%, such that the delta was only .5%? Would you hold bonds then? What if the mortgage was 2.5% (cited by someone else for a 15 year?) When exactly does it make sense to hold bonds in a portfolio?

What do YOU do? How did you select the amount of bonds you hold? You say you're not advocating 100/0, so what are you actually advocating?

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Re: Anybody purposely loading up on mortgage debt?

Post by willthrill81 » Fri Apr 21, 2017 3:01 pm

wolf359 wrote:
willthrill81 wrote:
You are still missing the total picture.

Let's say that someone has $100,000 of stocks, $100,000 of bonds, and a $100,000 mortgage balance. What is that person's real AA? If he is only looking at his investment portfolio, he would say 50% stocks and 50% bonds. But if he is looking at the whole situation, he is 33% stocks and 67% bonds. And with regard to those bonds (both positive ['plain' bonds] and negative [mortgage]), he is potentially borrowing $100,000 at 4% interest only to reinvest it at 2.5% (approximately at current yields). Let's say that he doesn't like that negative arbitrage deal and uses the $100,000 in 'plain' bonds to pay off the $100,000 mortgage balance. While he no longer holds bonds, he now has $100,000 of home equity that he didn't have before. And while that isn't directly generating an income, it's saving him 4% a year, which amounts to the same thing from a strict mathematical standpoint.

If you only consider your invested assets as part of your AA, you'll lose sight of this.


Okay, I get this point. Paying off a mortgage saves you money. I think I stated that up front.

But you're saying that NOT paying off the mortgage is also beneficial, and I don't see that point.


No, I didn't say that.

wolf359 wrote:What if his mortgage balance was $300,000? (Let's say that our hypothetical investor doesn't have enough money in taxable to pay off the mortgage outright.)

Using $100,000 in bonds to pay down the mortgage balance still leaves him with $200,000 to go. His net worth didn't change, since his $100,000 worth of bonds simply moved to $100,000 worth of home equity. His liquidity DEFINITELY changed -- it was cut in half.


For the fourth time, liquidity is indeed reduced by paying down (but not off) the mortgage. Liquidity isn't the whole picture though.

wolf359 wrote:Now, let's have the economy tank, so the stock market cuts in half, and he loses his job. His portfolio is now down to $50,000, and he's in danger of losing his house if he runs through his emergency fund and has to start tapping his equities. If he reaches that point, he's selling them when they're down.


I conceded that point many posts ago. There are still options in this case though. It's possible that the lender would reamortize the mortgage so as to reduce the monthly payment, for instance. In a worst case, you sell the home, cash out your equity, and find other living arrangements.

wolf359 wrote:If he had kept his bonds, then he still has a portfolio of $150,000. That gives him a lot more time to find a new job.


Didn't we preface this entire conversation with a fully funded emergency fund?

wolf359 wrote:Liquidity is valuable. Paying down a mortgage costs liquidity.


Yes, liquidity is valuable. That's why a fully funded emergency fund is vital IMHO. Beyond that, you are paying a real price for that liquidity by effectively borrowing money at, say, 4% interest only to loan it back out at 2.25%.

wolf359 wrote:I also noticed that you changed the cost of the mortgage from 3% to 4%. What if it actually was a low-cost mortgage, such as 3%, such that the delta was only .5%? Would you hold bonds then? What if the mortgage was 2.5% (cited by someone else for a 15 year?) When exactly does it make sense to hold bonds in a portfolio?


From a strict mathematical standpoint, it doesn't make sense to buy bonds when their yield is lower than your after-tax mortgage interest rate. If a person who wasn't itemizing their taxes, for instance, and had a 3% mortgage, they are still better off mathematically paying down that mortgage than investing in 2.25% bonds (assuming no taxes on the bonds). When the bond yields and the after-tax mortgage interest rate are equal, it's a mathematical wash.

wolf359 wrote:What do YOU do? How did you select the amount of bonds you hold? You say you're not advocating 100/0, so what are you actually advocating?


I've said what I'm doing. I'm aggressively paying off my mortgage. While I am indeed virtually 100% in equities with my invested portfolio (excluding my home), that is strictly a result of my risk tolerance and ~20 year horizon to retirement. But I also know that as I'm paying off my mortgage, I'm getting a guaranteed 3.25% (my rate) return on that money, and when the mortgage is paid off in around three years, then my liquidity will be through the roof, far higher than if I had used that money in bonds. I'll likely remain 100% equities in my invested portfolio until I'm around ten years from retirement, at which point I'll likely back down to something like 70/30.

Some financial advisers advocate a bit of a mixed approach to this issue, attempting to address both of our concerns. They advocate saving the money that you would otherwise be using to pay down the mortgage in a taxable account and invest it in short- or intermediate-term bonds. When you eventually have enough funds to pay off the mortgage with that money, you do so in one fail swoop. You maintain liquidity throughout the process, which addresses your concern, but again, this comes at the cost of the spread between the yield on your bonds and your after-tax mortgage rate.
Last edited by willthrill81 on Fri Apr 21, 2017 3:04 pm, edited 2 times in total.
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Re: Anybody purposely loading up on mortgage debt?

Post by LukeHeinz57 » Fri Apr 21, 2017 3:02 pm

A little less than a year ago I refinanced and pulled approx. $75,000 in equity out to invest. 3.5% Fixed for 30 years. At the time I did it I was still 100/0 as I have been for almost all of the last decade plus.

Recently, for numerous reasons I've made a change and now have an 85/15 asset allocation. While I agree at the moment I am paying for the liquidity by having bonds in my asset allocation and paying on a mortgage (per the discussion above) there is one simple reason I think this was a wise move.

I believe the odds that I will be able to earn an after-tax yield greater than the 2.625% after-tax rate of my mortgage (yes I itemize, 25% bracket) for the vast majority of the 30 year period are strongly in my favor. You can say I'm a fool for believing that I know better than the market and that this bet will play out poorly, but I have to say this feels like one of the safer bets I've taken all things considered.

By taking a tiny bit of credit risk in VBILX/BIV 2.64% SEC Yield 1.98% tax adjusted for me I'm already only paying 65bp for the liquidity. Three Rate increases later say in the next year or less even and I am already on the positive side 2 years into the 30 year experiment.

Basically, I am writing to confirm for the OP that yes people have/are doing this and putting their money where their mouth is. :beer
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Re: Anybody purposely loading up on mortgage debt?

Post by willthrill81 » Fri Apr 21, 2017 3:09 pm

LukeHeinz57 wrote:A little less than a year ago I refinanced and pulled approx. $75,000 in equity out to invest. 3.5% Fixed for 30 years. At the time I did it I was still 100/0 as I have been for almost all of the last decade plus.

Recently, for numerous reasons I've made a change and now have an 85/15 asset allocation. While I agree at the moment I am paying for the liquidity by having bonds in my asset allocation and paying on a mortgage (per the discussion above) there is one simple reason I think this was a wise move.

I believe the odds that I will be able to earn an after-tax yield greater than the 2.625% after-tax rate of my mortgage (yes I itemize, 25% bracket) for the vast majority of the 30 year period are strongly in my favor. You can say I'm a fool for believing that I know better than the market and that this bet will play out poorly, but I have to say this feels like one of the safer bets I've taken all things considered.

By taking a tiny bit of credit risk in VBILX/BIV 2.64% SEC Yield 1.98% tax adjusted for me I'm already only paying 65bp for the liquidity. Three Rate increases later say in the next year or less even and I am already on the positive side 2 years into the 30 year experiment.

Basically, I am writing to confirm for the OP that yes people have/are doing this and putting their money where their mouth is. :beer


You've done the math, and you know the risks and the costs. That has been my point all along; people doing this need to know exactly what they're doing.

It may be a little nit-picky, but your effective after-tax rate on your mortgage is higher than 2.625% even though you are in the 25% bracket. If you didn't itemize at all, a married filing jointly couple could still take the standard deduction of $12,600. So if you had itemized deductions of double that, $25,200, the benefit of itemizing only reduces the effective mortgage rate by half your tax rate, or 12.5%. Granted, if you were going to be itemizing even without the mortgage interest, this may not be a real issue, but this is a factor glossed over by nearly everyone.
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Re: Anybody purposely loading up on mortgage debt?

Post by TheJoker » Fri Apr 21, 2017 6:30 pm

I'm one of the 10% of people who believes 4% mortgage interest is great because I can invest the cash flow from not paying off the debt in the 500 index at a long term rate of return of 7%. This is what banks have been doing forever. They give you 2% on your savings and lend it out at a much higher rate. It works for me. Maybe not for everyone, just outside the box thinking. "If you follow the crowd....your destine to be average."

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Re: Anybody purposely loading up on mortgage debt?

Post by Bacchus01 » Fri Apr 21, 2017 6:36 pm

Working on a cash out refi right now

5 ARM will reset June 1 and move from 2.25% to 4.125%. Will refi to a 15 fixed at a hair under 3% while pulling out about $100K

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Re: Anybody purposely loading up on mortgage debt?

Post by hightower » Fri Apr 21, 2017 7:08 pm

I currently have about $25k-30k in home improvement projects that need to be done on our home (exterior painting, masonry work, storm windows, etc). I'm trying to decide if I should take out a home improvement loan and pay it off quickly (4 yrs at 4%) or just refinance my mortgage and take cash out? The difference in payments would be around $570/month for the home improvement loan vs an additional $90/month for the refinance. The refinance option would cost me more in closing costs of course
.
We have a ton of equity in our house. Current mortgage balance is $295k and the house is worth somewhere around $575k

It would be nice to have the extra cash flow for dumping more money into our taxable brokerage account each month.

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