Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

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305pelusa
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Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by 305pelusa » Tue Oct 15, 2019 9:08 am

Lee_WSP wrote:
Tue Oct 15, 2019 8:59 am
305pelusa wrote:
Mon Oct 14, 2019 4:02 pm
Bdouvs wrote:
Mon Oct 14, 2019 8:10 am
Hi Everyone,

My wife and I, (mostly my wife) decided we should use the cash to prepay the mortgage and have the guaranteed return. Over 20 years (loan term) it'll shave off a year of payments and about $17k in interest.

Thanks for the comments/advice
I'm calculating a profit of around 585 post tax.

Assuming a 25% tax bracket, you'd need to earn 780 bucks to make that. Depending on your hourly pay, that might be 2+ days of work.

I would GLADLY skip work for 2 days if all it took was to do what you've done. Which probably took less than an hour to set up. I think it's a very low risk, solid decision.
But since mortgages are so front loaded, are you really making $585? Because that payoff is not happening until 20-29 years down the road. If the mortgage is almost paid off, then you aren't netting that much either because you're not reducing the interest payments at all.
It's a payout of 585 today. In effect he's reducing his mortgage by 585 over these 18 months. What it really looks like is that in 20-29 years, OP will have saved 585 compounded at 3.5%.

petulant
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Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by petulant » Tue Oct 15, 2019 9:27 am

305pelusa wrote:
Tue Oct 15, 2019 9:08 am
Lee_WSP wrote:
Tue Oct 15, 2019 8:59 am
305pelusa wrote:
Mon Oct 14, 2019 4:02 pm
Bdouvs wrote:
Mon Oct 14, 2019 8:10 am
Hi Everyone,

My wife and I, (mostly my wife) decided we should use the cash to prepay the mortgage and have the guaranteed return. Over 20 years (loan term) it'll shave off a year of payments and about $17k in interest.

Thanks for the comments/advice
I'm calculating a profit of around 585 post tax.

Assuming a 25% tax bracket, you'd need to earn 780 bucks to make that. Depending on your hourly pay, that might be 2+ days of work.

I would GLADLY skip work for 2 days if all it took was to do what you've done. Which probably took less than an hour to set up. I think it's a very low risk, solid decision.
But since mortgages are so front loaded, are you really making $585? Because that payoff is not happening until 20-29 years down the road. If the mortgage is almost paid off, then you aren't netting that much either because you're not reducing the interest payments at all.
It's a payout of 585 today. In effect he's reducing his mortgage by 585 over these 18 months. What it really looks like is that in 20-29 years, OP will have saved 585 compounded at 3.5%.
Problem is, he has to pay back the $20,000 loan from somewhere--plus the flat 2% fee. He could just as easily send that extra payment to the mortgage directly. So the savings is actually much less, closer to $200 as I described.

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305pelusa
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Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by 305pelusa » Tue Oct 15, 2019 9:48 am

petulant wrote:
Tue Oct 15, 2019 9:27 am
305pelusa wrote:
Tue Oct 15, 2019 9:08 am
Lee_WSP wrote:
Tue Oct 15, 2019 8:59 am
305pelusa wrote:
Mon Oct 14, 2019 4:02 pm
Bdouvs wrote:
Mon Oct 14, 2019 8:10 am
Hi Everyone,

My wife and I, (mostly my wife) decided we should use the cash to prepay the mortgage and have the guaranteed return. Over 20 years (loan term) it'll shave off a year of payments and about $17k in interest.

Thanks for the comments/advice
I'm calculating a profit of around 585 post tax.

Assuming a 25% tax bracket, you'd need to earn 780 bucks to make that. Depending on your hourly pay, that might be 2+ days of work.

I would GLADLY skip work for 2 days if all it took was to do what you've done. Which probably took less than an hour to set up. I think it's a very low risk, solid decision.
But since mortgages are so front loaded, are you really making $585? Because that payoff is not happening until 20-29 years down the road. If the mortgage is almost paid off, then you aren't netting that much either because you're not reducing the interest payments at all.
It's a payout of 585 today. In effect he's reducing his mortgage by 585 over these 18 months. What it really looks like is that in 20-29 years, OP will have saved 585 compounded at 3.5%.
Problem is, he has to pay back the $20,000 loan from somewhere--plus the flat 2% fee. He could just as easily send that extra payment to the mortgage directly. So the savings is actually much less, closer to $200 as I described.
Huh I thought it was an 18k loan. You're right the payout is more like 650.

Not sure where you're getting the 200 from. I'm reasonably certain it's wrong and 650 is correct.

petulant
Posts: 751
Joined: Thu Sep 22, 2016 1:09 pm

Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by petulant » Tue Oct 15, 2019 10:09 am

305pelusa wrote:
Tue Oct 15, 2019 9:48 am
petulant wrote:
Tue Oct 15, 2019 9:27 am
305pelusa wrote:
Tue Oct 15, 2019 9:08 am
Lee_WSP wrote:
Tue Oct 15, 2019 8:59 am
305pelusa wrote:
Mon Oct 14, 2019 4:02 pm


I'm calculating a profit of around 585 post tax.

Assuming a 25% tax bracket, you'd need to earn 780 bucks to make that. Depending on your hourly pay, that might be 2+ days of work.

I would GLADLY skip work for 2 days if all it took was to do what you've done. Which probably took less than an hour to set up. I think it's a very low risk, solid decision.
But since mortgages are so front loaded, are you really making $585? Because that payoff is not happening until 20-29 years down the road. If the mortgage is almost paid off, then you aren't netting that much either because you're not reducing the interest payments at all.
It's a payout of 585 today. In effect he's reducing his mortgage by 585 over these 18 months. What it really looks like is that in 20-29 years, OP will have saved 585 compounded at 3.5%.
Problem is, he has to pay back the $20,000 loan from somewhere--plus the flat 2% fee. He could just as easily send that extra payment to the mortgage directly. So the savings is actually much less, closer to $200 as I described.
Huh I thought it was an 18k loan. You're right the payout is more like 650.

Not sure where you're getting the 200 from. I'm reasonably certain it's wrong and 650 is correct.
I showed my math on an earlier post. The payments for the $20,000 have to come from somewhere. Those payments could go directly to the mortgage instead. Those payments would take a longer amount of time over 18 months, but they would still result in interest savings. You should reduce the savings by that number. The relevant calculation is the following:

(Gross Interest Savings from Loan) - (Loan Fee) - (Interest Savings from Alternative Prepayment)

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305pelusa
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Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by 305pelusa » Tue Oct 15, 2019 10:24 am

petulant wrote:
Tue Oct 15, 2019 10:09 am
305pelusa wrote:
Tue Oct 15, 2019 9:48 am
petulant wrote:
Tue Oct 15, 2019 9:27 am
305pelusa wrote:
Tue Oct 15, 2019 9:08 am
Lee_WSP wrote:
Tue Oct 15, 2019 8:59 am


But since mortgages are so front loaded, are you really making $585? Because that payoff is not happening until 20-29 years down the road. If the mortgage is almost paid off, then you aren't netting that much either because you're not reducing the interest payments at all.
It's a payout of 585 today. In effect he's reducing his mortgage by 585 over these 18 months. What it really looks like is that in 20-29 years, OP will have saved 585 compounded at 3.5%.
Problem is, he has to pay back the $20,000 loan from somewhere--plus the flat 2% fee. He could just as easily send that extra payment to the mortgage directly. So the savings is actually much less, closer to $200 as I described.
Huh I thought it was an 18k loan. You're right the payout is more like 650.

Not sure where you're getting the 200 from. I'm reasonably certain it's wrong and 650 is correct.
I showed my math on an earlier post. The payments for the $20,000 have to come from somewhere. Those payments could go directly to the mortgage instead. Those payments would take a longer amount of time over 18 months, but they would still result in interest savings. You should reduce the savings by that number. The relevant calculation is the following:

(Gross Interest Savings from Loan) - (Loan Fee) - (Interest Savings from Alternative Prepayment)
I think I know what you're talking about but you're using strange language for it. Let's see if we're talking about the same thing:
Let's say the mortgage bank allowed you to take equity out of the house at will. So to pay back the 20k, he just pulled it out of the house equity. The return on this strategy would thus be 650 dollars. Would you agree with this?

petulant
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Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by petulant » Tue Oct 15, 2019 11:20 am

305pelusa wrote:
Tue Oct 15, 2019 10:24 am
petulant wrote:
Tue Oct 15, 2019 10:09 am
305pelusa wrote:
Tue Oct 15, 2019 9:48 am
petulant wrote:
Tue Oct 15, 2019 9:27 am
305pelusa wrote:
Tue Oct 15, 2019 9:08 am

It's a payout of 585 today. In effect he's reducing his mortgage by 585 over these 18 months. What it really looks like is that in 20-29 years, OP will have saved 585 compounded at 3.5%.
Problem is, he has to pay back the $20,000 loan from somewhere--plus the flat 2% fee. He could just as easily send that extra payment to the mortgage directly. So the savings is actually much less, closer to $200 as I described.
Huh I thought it was an 18k loan. You're right the payout is more like 650.

Not sure where you're getting the 200 from. I'm reasonably certain it's wrong and 650 is correct.
I showed my math on an earlier post. The payments for the $20,000 have to come from somewhere. Those payments could go directly to the mortgage instead. Those payments would take a longer amount of time over 18 months, but they would still result in interest savings. You should reduce the savings by that number. The relevant calculation is the following:

(Gross Interest Savings from Loan) - (Loan Fee) - (Interest Savings from Alternative Prepayment)
I think I know what you're talking about but you're using strange language for it. Let's see if we're talking about the same thing:
Let's say the mortgage bank allowed you to take equity out of the house at will. So to pay back the 20k, he just pulled it out of the house equity. The return on this strategy would thus be 650 dollars. Would you agree with this?
Yes, I think if you could just pull the equity out at the last minute, the savings would be in that range.

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305pelusa
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Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by 305pelusa » Tue Oct 15, 2019 12:27 pm

petulant wrote:
Tue Oct 15, 2019 11:20 am
305pelusa wrote:
Tue Oct 15, 2019 10:24 am
petulant wrote:
Tue Oct 15, 2019 10:09 am
305pelusa wrote:
Tue Oct 15, 2019 9:48 am
petulant wrote:
Tue Oct 15, 2019 9:27 am


Problem is, he has to pay back the $20,000 loan from somewhere--plus the flat 2% fee. He could just as easily send that extra payment to the mortgage directly. So the savings is actually much less, closer to $200 as I described.
Huh I thought it was an 18k loan. You're right the payout is more like 650.

Not sure where you're getting the 200 from. I'm reasonably certain it's wrong and 650 is correct.
I showed my math on an earlier post. The payments for the $20,000 have to come from somewhere. Those payments could go directly to the mortgage instead. Those payments would take a longer amount of time over 18 months, but they would still result in interest savings. You should reduce the savings by that number. The relevant calculation is the following:

(Gross Interest Savings from Loan) - (Loan Fee) - (Interest Savings from Alternative Prepayment)
I think I know what you're talking about but you're using strange language for it. Let's see if we're talking about the same thing:
Let's say the mortgage bank allowed you to take equity out of the house at will. So to pay back the 20k, he just pulled it out of the house equity. The return on this strategy would thus be 650 dollars. Would you agree with this?
Yes, I think if you could just pull the equity out at the last minute, the savings would be in that range.
Ok we're talking about the same thing. What you're saying is that the money you'll use to pay that loan won't be earning interest. That assumes OP pays the loan by making periodic paycheck payments over 18 months. That's how you got the 200 figure presumably.

But OP can pay it in smarter ways. He could defer payments until the last 6 months for instance (provided he can stay on track/schedule). And he should put the payments into a MM/VTI and once the loan is due, move the 20k from that to the loan. I do not know OP's circumstances so I can't say what how he could pay the loan down most effectively

Oakwood42
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Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by Oakwood42 » Tue Oct 15, 2019 12:34 pm

305pelusa wrote:
Fri Oct 11, 2019 9:34 pm
Sounds like an excellent idea. Invest it per your IPS (whether that's stocks or mortgage, or whatever else)
+1

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sergeant
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Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by sergeant » Tue Oct 15, 2019 3:30 pm

Bdouvs wrote:
Mon Oct 14, 2019 8:10 am
Hi Everyone,

My wife and I, (mostly my wife) decided we should use the cash to prepay the mortgage and have the guaranteed return. Over 20 years (loan term) it'll shave off a year of payments and about $17k in interest.

Thanks for the comments/advice
Your math is way off! But hey, if this is how you want to think about it, why not just take one of these loan offers every year? Based on your logic your mortgage will be paid for by the CC company.
Lincoln 3 EOW! AA 40/60.

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Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by LadyGeek » Tue Oct 15, 2019 4:21 pm

This thread is now in the Personal Finance (Not Investing) forum (loan vs. investing).

See the wiki: Paying down loans versus investing
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Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by sunny_socal » Wed Oct 16, 2019 9:37 am

sergeant wrote:
Sat Oct 12, 2019 10:40 pm
No meat on the bones or more plainly seems like way too much bother for very little reward. I wouldn't do it.
I'm with sergeant. I've been sucked in by offers like this before and it only adds stress to life.

fujiters
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Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by fujiters » Wed Oct 16, 2019 10:14 am

I don't think it's enough money to bother, but if this sort of thing appeals to you, there are also banks out there offering 0% interest without a transfer free:

https://www.doctorofcredit.com/master-l ... -transfers
“The purpose of the margin of safety is to render the forecast unnecessary.” -Benjamin Graham

peseta
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Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by peseta » Wed Oct 16, 2019 10:48 am

This thread is interesting to read in light of the frequent "should I pay down my mortgage" threads on this board, and the famous (and oft-quoted here) Dave Ramsey turning-it-on-its-head responsive question, "Would you borrow money at [mortgage rate]% to invest in the stock market?"

peseta

petulant
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Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by petulant » Wed Oct 16, 2019 4:00 pm

305pelusa wrote:
Tue Oct 15, 2019 12:27 pm
petulant wrote:
Tue Oct 15, 2019 11:20 am
305pelusa wrote:
Tue Oct 15, 2019 10:24 am
petulant wrote:
Tue Oct 15, 2019 10:09 am
305pelusa wrote:
Tue Oct 15, 2019 9:48 am


Huh I thought it was an 18k loan. You're right the payout is more like 650.

Not sure where you're getting the 200 from. I'm reasonably certain it's wrong and 650 is correct.
I showed my math on an earlier post. The payments for the $20,000 have to come from somewhere. Those payments could go directly to the mortgage instead. Those payments would take a longer amount of time over 18 months, but they would still result in interest savings. You should reduce the savings by that number. The relevant calculation is the following:

(Gross Interest Savings from Loan) - (Loan Fee) - (Interest Savings from Alternative Prepayment)
I think I know what you're talking about but you're using strange language for it. Let's see if we're talking about the same thing:
Let's say the mortgage bank allowed you to take equity out of the house at will. So to pay back the 20k, he just pulled it out of the house equity. The return on this strategy would thus be 650 dollars. Would you agree with this?
Yes, I think if you could just pull the equity out at the last minute, the savings would be in that range.
Ok we're talking about the same thing. What you're saying is that the money you'll use to pay that loan won't be earning interest. That assumes OP pays the loan by making periodic paycheck payments over 18 months. That's how you got the 200 figure presumably.

But OP can pay it in smarter ways. He could defer payments until the last 6 months for instance (provided he can stay on track/schedule). And he should put the payments into a MM/VTI and once the loan is due, move the 20k from that to the loan. I do not know OP's circumstances so I can't say what how he could pay the loan down most effectively
You could. With 1.8% interest rates more or less, that would add $270 to the strategy. So based on the specific math I posted before, it would be a net benefit of $395. Now, that's before taxes. The truth is that the savings on the mortgage might have been tax deductible, so the real benefit is less. Further, the interest on the MM or savings account could also be taxed, resulting in a lower benefit there. I don't think the complexity and risk are worth it for $395, and I expect the tax implications would make it worse for most.

SovereignInvestor
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Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by SovereignInvestor » Wed Oct 16, 2019 5:18 pm

Raraculus wrote:
Mon Oct 14, 2019 6:55 pm
grabiner wrote:
Mon Oct 14, 2019 5:12 pm
Raraculus wrote:
Mon Oct 14, 2019 4:46 pm
SovereignInvestor wrote:
Fri Oct 11, 2019 9:38 pm
If one wanted to lever stock investments best way is deep ITM call options on SPX. It is implicitly borrowing at risk free rate to buy stock.
I like the way you think. I recently looked into this, and it appears that SPX call options do not pay dividends. So, it'll be a no from me.
Option traders know that the option will not pay dividends, while the underlying index or stock will, and they set the price accordingly when trading. Thus you do not lose the value of the dividend. (If this didn't work, there would be a free lunch, as traders could write a deep-in-the-money option, buy the stock, and get a guaranteed profit from the dividends.)
That makes sense. Thank you for the explanation.
SPX and index options also receive more favorable tax treatment

petulant
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Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by petulant » Wed Oct 16, 2019 5:39 pm

SovereignInvestor wrote:
Wed Oct 16, 2019 5:18 pm
Raraculus wrote:
Mon Oct 14, 2019 6:55 pm
grabiner wrote:
Mon Oct 14, 2019 5:12 pm
Raraculus wrote:
Mon Oct 14, 2019 4:46 pm
SovereignInvestor wrote:
Fri Oct 11, 2019 9:38 pm
If one wanted to lever stock investments best way is deep ITM call options on SPX. It is implicitly borrowing at risk free rate to buy stock.
I like the way you think. I recently looked into this, and it appears that SPX call options do not pay dividends. So, it'll be a no from me.
Option traders know that the option will not pay dividends, while the underlying index or stock will, and they set the price accordingly when trading. Thus you do not lose the value of the dividend. (If this didn't work, there would be a free lunch, as traders could write a deep-in-the-money option, buy the stock, and get a guaranteed profit from the dividends.)
That makes sense. Thank you for the explanation.
SPX and index options also receive more favorable tax treatment
Favorable compared to what? 60% long-term and 40% short-term is less favorable than the 100% long-term rate applicable to stock sales held for long than a year.

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305pelusa
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Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by 305pelusa » Wed Oct 16, 2019 6:25 pm

petulant wrote:
Wed Oct 16, 2019 4:00 pm
305pelusa wrote:
Tue Oct 15, 2019 12:27 pm
petulant wrote:
Tue Oct 15, 2019 11:20 am
305pelusa wrote:
Tue Oct 15, 2019 10:24 am
petulant wrote:
Tue Oct 15, 2019 10:09 am


I showed my math on an earlier post. The payments for the $20,000 have to come from somewhere. Those payments could go directly to the mortgage instead. Those payments would take a longer amount of time over 18 months, but they would still result in interest savings. You should reduce the savings by that number. The relevant calculation is the following:

(Gross Interest Savings from Loan) - (Loan Fee) - (Interest Savings from Alternative Prepayment)
I think I know what you're talking about but you're using strange language for it. Let's see if we're talking about the same thing:
Let's say the mortgage bank allowed you to take equity out of the house at will. So to pay back the 20k, he just pulled it out of the house equity. The return on this strategy would thus be 650 dollars. Would you agree with this?
Yes, I think if you could just pull the equity out at the last minute, the savings would be in that range.
Ok we're talking about the same thing. What you're saying is that the money you'll use to pay that loan won't be earning interest. That assumes OP pays the loan by making periodic paycheck payments over 18 months. That's how you got the 200 figure presumably.

But OP can pay it in smarter ways. He could defer payments until the last 6 months for instance (provided he can stay on track/schedule). And he should put the payments into a MM/VTI and once the loan is due, move the 20k from that to the loan. I do not know OP's circumstances so I can't say what how he could pay the loan down most effectively
You could. With 1.8% interest rates more or less, that would add $270 to the strategy. So based on the specific math I posted before, it would be a net benefit of $395. Now, that's before taxes. The truth is that the savings on the mortgage might have been tax deductible, so the real benefit is less. Further, the interest on the MM or savings account could also be taxed, resulting in a lower benefit there. I don't think the complexity and risk are worth it for $395, and I expect the tax implications would make it worse for most.
No that's not quite right. Remember, the ideal thing is to DEFER. And pay it off by focusing all savings from paychecks for, say, the last 6 months. If you direct all savings to the loan on the last 6 months, then the 20k spends, on average only 3 months earning no interest with the loan (vs the base case of 3.5% as we talked previously). This is only a loss of 20k*3.5%/12*3 = 175.

But there's more. Put that money for the last 6 months into a MM and you'll get back 90 bucks too. For a total loss of 85 dollars and a total gain of 650-85 = 565.

As for taxes, the mortgage deduction is a good point, yes. But the tax on the MM isn't because he could have the MM in the tax-advantaged space and then pay off the loan by selling taxable stocks while simultaneously converting the MM funds in the tax advantaged space into stocks. Money is fungible. If his taxable account is large enough, he might not even do any of this. Just pull the money out when you need it. You don't have to mentally account and keep a separate risk-free investment precisely to meet the loan liability.

Fact is, if we knew OP's cash flow, taxable holdings, etc, we could tell how much he'll make. If he's bad at paying back (like in your scenarios), he won't net much. If he keeps investing as per his IPS, into holdings than maybe return more than 3.5%, or does a balance transfer at the end for 3% for another 18 months, etc, etc, he could net more. It's impossible to say. But it'll be close to 650 if you're diligent and smart about it.

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305pelusa
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Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by 305pelusa » Wed Oct 16, 2019 6:30 pm

petulant wrote:
Wed Oct 16, 2019 5:39 pm
SovereignInvestor wrote:
Wed Oct 16, 2019 5:18 pm
Raraculus wrote:
Mon Oct 14, 2019 6:55 pm
grabiner wrote:
Mon Oct 14, 2019 5:12 pm
Raraculus wrote:
Mon Oct 14, 2019 4:46 pm
I like the way you think. I recently looked into this, and it appears that SPX call options do not pay dividends. So, it'll be a no from me.
Option traders know that the option will not pay dividends, while the underlying index or stock will, and they set the price accordingly when trading. Thus you do not lose the value of the dividend. (If this didn't work, there would be a free lunch, as traders could write a deep-in-the-money option, buy the stock, and get a guaranteed profit from the dividends.)
That makes sense. Thank you for the explanation.
SPX and index options also receive more favorable tax treatment
Favorable compared to what? 60% long-term and 40% short-term is less favorable than the 100% long-term rate applicable to stock sales held for long than a year.
Maybe not SPX or index options, but calls on the S&P 500 SPDR ETF (SPY) would behave similarly and, if held for a year, receive full LTCG treatment. The time premium you pay is fully deductible as well. These could be more tax-efficient because you don't receive the taxable dividends every year, but there's the disadvantage that you'll have to realize your gains within a couple of years (while you could keep holding the ETFs for decades without realizing anything).

Lee_WSP
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Location: Arizona

Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by Lee_WSP » Thu Oct 17, 2019 12:30 am

peseta wrote:
Wed Oct 16, 2019 10:48 am
This thread is interesting to read in light of the frequent "should I pay down my mortgage" threads on this board, and the famous (and oft-quoted here) Dave Ramsey turning-it-on-its-head responsive question, "Would you borrow money at [mortgage rate]% to invest in the stock market?"

peseta
I would.

petulant
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Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by petulant » Thu Oct 17, 2019 5:44 am

305pelusa wrote:
Wed Oct 16, 2019 6:25 pm
petulant wrote:
Wed Oct 16, 2019 4:00 pm
305pelusa wrote:
Tue Oct 15, 2019 12:27 pm
petulant wrote:
Tue Oct 15, 2019 11:20 am
305pelusa wrote:
Tue Oct 15, 2019 10:24 am


I think I know what you're talking about but you're using strange language for it. Let's see if we're talking about the same thing:
Let's say the mortgage bank allowed you to take equity out of the house at will. So to pay back the 20k, he just pulled it out of the house equity. The return on this strategy would thus be 650 dollars. Would you agree with this?
Yes, I think if you could just pull the equity out at the last minute, the savings would be in that range.
Ok we're talking about the same thing. What you're saying is that the money you'll use to pay that loan won't be earning interest. That assumes OP pays the loan by making periodic paycheck payments over 18 months. That's how you got the 200 figure presumably.

But OP can pay it in smarter ways. He could defer payments until the last 6 months for instance (provided he can stay on track/schedule). And he should put the payments into a MM/VTI and once the loan is due, move the 20k from that to the loan. I do not know OP's circumstances so I can't say what how he could pay the loan down most effectively
You could. With 1.8% interest rates more or less, that would add $270 to the strategy. So based on the specific math I posted before, it would be a net benefit of $395. Now, that's before taxes. The truth is that the savings on the mortgage might have been tax deductible, so the real benefit is less. Further, the interest on the MM or savings account could also be taxed, resulting in a lower benefit there. I don't think the complexity and risk are worth it for $395, and I expect the tax implications would make it worse for most.
No that's not quite right. Remember, the ideal thing is to DEFER. And pay it off by focusing all savings from paychecks for, say, the last 6 months. If you direct all savings to the loan on the last 6 months, then the 20k spends, on average only 3 months earning no interest with the loan (vs the base case of 3.5% as we talked previously). This is only a loss of 20k*3.5%/12*3 = 175.

But there's more. Put that money for the last 6 months into a MM and you'll get back 90 bucks too. For a total loss of 85 dollars and a total gain of 650-85 = 565.

As for taxes, the mortgage deduction is a good point, yes. But the tax on the MM isn't because he could have the MM in the tax-advantaged space and then pay off the loan by selling taxable stocks while simultaneously converting the MM funds in the tax advantaged space into stocks. Money is fungible. If his taxable account is large enough, he might not even do any of this. Just pull the money out when you need it. You don't have to mentally account and keep a separate risk-free investment precisely to meet the loan liability.

Fact is, if we knew OP's cash flow, taxable holdings, etc, we could tell how much he'll make. If he's bad at paying back (like in your scenarios), he won't net much. If he keeps investing as per his IPS, into holdings than maybe return more than 3.5%, or does a balance transfer at the end for 3% for another 18 months, etc, etc, he could net more. It's impossible to say. But it'll be close to 650 if you're diligent and smart about it.
I don't think it's right to assume sufficient savings to pay off the loan only based on the last six months of the term. Doing back of the envelope math is most appropriate and neutral assuming just enough savings each paycheck to pay it back on equal installments over the term. Of course additional deferral is better, but by assuming additional deferral is available, you're making the back-of-the-envelope math better than it should be. Notably, if there was that much savings available, the benefit of this strategy is worth less relative to overall income and wealth.

Assuming the use of stocks is inappropriate because it involves extra risk. If the economic justification is based on using these, it's a risk play, not arbitrage. Further, selling taxable may incur taxes.

Yes, if we knew specifics we could calculate more deferral with specifics. Thing is, about $650 is the maximum benefit. It is easily messed up by opportunity cost, taxes, execution risk, etc. Not worth it.

petulant
Posts: 751
Joined: Thu Sep 22, 2016 1:09 pm

Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by petulant » Thu Oct 17, 2019 6:04 am

305pelusa wrote:
Wed Oct 16, 2019 6:30 pm
petulant wrote:
Wed Oct 16, 2019 5:39 pm
SovereignInvestor wrote:
Wed Oct 16, 2019 5:18 pm
Raraculus wrote:
Mon Oct 14, 2019 6:55 pm
grabiner wrote:
Mon Oct 14, 2019 5:12 pm
Option traders know that the option will not pay dividends, while the underlying index or stock will, and they set the price accordingly when trading. Thus you do not lose the value of the dividend. (If this didn't work, there would be a free lunch, as traders could write a deep-in-the-money option, buy the stock, and get a guaranteed profit from the dividends.)
That makes sense. Thank you for the explanation.
SPX and index options also receive more favorable tax treatment
Favorable compared to what? 60% long-term and 40% short-term is less favorable than the 100% long-term rate applicable to stock sales held for long than a year.
Maybe not SPX or index options, but calls on the S&P 500 SPDR ETF (SPY) would behave similarly and, if held for a year, receive full LTCG treatment. The time premium you pay is fully deductible as well. These could be more tax-efficient because you don't receive the taxable dividends every year, but there's the disadvantage that you'll have to realize your gains within a couple of years (while you could keep holding the ETFs for decades without realizing anything).
Yeah, a specific strategy might be acceptable. I just don't think the SPX stuff is necessarily more efficient. One thing about realizing gains and resetting basis every couple years is that you actually reduce risk from volatility because the true gain for any increase is value would be reduced, while the true loss for any decrease would be reduced (assuming tax loss can be effectively used). The aftertax volatility is thus less. That means a higher stock allocation may be possible.

JGoneRiding
Posts: 1808
Joined: Tue Jul 15, 2014 3:26 pm

Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by JGoneRiding » Thu Oct 17, 2019 9:17 am

Strayshot wrote:
Fri Oct 11, 2019 10:48 pm
And if you pay towards mortgage, where will you get the capital to pay off the loan when it is due in 1.5 years?
I get credit card balance transfer offers like this all the time. If you can find a fixed income investment that pays a roughly equal interest rate you still lose because of taxes. At most you make $200 or so and end up with 100-150 after taxes. Is that really worth the hassle?
Most banks offer 200 to 500 bonus regularly if you can meet their requirements. So potentially you could move the money around a bunch and make a good return

drgenefish
Posts: 52
Joined: Sun Feb 12, 2017 2:52 pm

Re: Offered 18-Month, 0% interest loan w/2% fee. Should I take the loan and invest or pass on the offer?

Post by drgenefish » Sat Oct 19, 2019 12:58 pm

I feel like one lesson I learned here is sometimes simplicity >> optimization. Seems like a lot of gyrations to make a few hundred $ over 18 months as your BEST case. I’d just pass and keep life simple.

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