Rates so low. Should we take out a mortgage on home?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
tryingtogetahead
Posts: 79
Joined: Tue Apr 07, 2020 11:45 am

Rates so low. Should we take out a mortgage on home?

Post by tryingtogetahead »

DW and I are 37 years old, no kids yet but trying, live in MCOL area, 50-60k annual expenses, 550k total household income, and NW 3.25mm broken down as follows: RE equity 1.34mm (750k primary home with no mortgage but 105k drawn HELOC + 800k rental with 533k mortgage + 350k paid off rental + 75k RealtyShares crowdfunding investment), retirement accts 1.16mm, taxable accts 690k, private investment 16k (paying fixed 5%), misc 44k, cash 16k, and student loan (19k) (fixed 1.625% 25 yr loan).

Question: We played major defense early in our careers and paid off over 200k of student loans by age 29, our primary home mortgage by age 32, and one rental by age 36. Those turned out to be major mistakes given how the market has performed. Our only current debts are 105k HELOC on primary home, 533k mortgage on one rental, and 19k of student loans. We understand this creates sequence of return risk, but a bank quoted me 2.5% for a 30 year fixed mortgage of 510k on our primary residence. We would pay off the HELOC and have 405k left, which we would invest. I hate debt and crushed our debt over the years but these insanely low rates are killing me and making me want to take advantage of them. Otherwise, I feel like this is a missed opportunity. Thoughts?
User avatar
unclescrooge
Posts: 5342
Joined: Thu Jun 07, 2012 7:00 pm

Re: Rates so low. Should we take out a mortgage on home?

Post by unclescrooge »

Based on your $3.2 m networth and $550k income, it won't make any difference one way or another.

I call this optimizing around the margins.

That being said, I just pulled out $500k home equity and invested it in my wife's business :mrgreen:
RocketShipTech
Posts: 679
Joined: Sat Jun 13, 2020 10:08 pm

Re: Rates so low. Should we take out a mortgage on home?

Post by RocketShipTech »

tryingtogetahead wrote: Mon Aug 10, 2020 10:39 pm We played major defense early in our careers and paid off over 200k of student loans by age 29, our primary home mortgage by age 32, and one rental by age 36. Those turned out to be major mistakes given how the market has performed.
A cautionary tale for all Bogleheads
boglemymind314
Posts: 5
Joined: Wed Aug 05, 2020 11:56 am

Re: Rates so low. Should we take out a mortgage on home?

Post by boglemymind314 »

Thoughts (worth what you paid for them):

You're offered $500k or so of loan at 2.5% over a 30 year term. It looks like this will qualify for the home mortgage interest deduction. That means the interest will be in very large part paid for by 1-3 levels of government(s). At $550k of total household income you're probably already paying 35% in federal income taxes. So 35% of your 2.5% interest will be paid for by the feds. I don't what your state/local income taxes are but let's be conservative and say they're 0%. All the same, about 1/3 of your interest expense is now paid for by the feds. So your after-tax interest rate is really more like 1.66%.

With a household income of $550k and $3.3mm net worth it sounds like you're not going to have any problem meeting the mortgage payments.

Two ways I think of this: one way is to ask will the collateral grow by at least 1.66%? Probably, more or less. 1.66% growth in real estate prices over 30 years is very normal. So you could borrow the money and at the end the growth in value of the asset would have matched the underlying interest rate you were paying on the debt. It's practically risk-less. (I realize there's a lot of Vegas houseflippers from 2006 who beg to differ.) Suppose home prices in your area grow at 2% over the next 30 years, which is hardly implausible - in that case, you've already come out ahead if you just stick the cash in a money market fund.

The more important question is what would you do with the leverage? Put the proceeds into some defensive stocks like utilities? Buy another rental? Buy the S&P? Just pick a random basket of mid-big cap stocks and pick a random 30 year period. Will the return be greater than 1.66%? For how many 30 year periods that have occurred over the last century would you beat 1.66% by investing in the stock market? What would your median return be over those iterations? A back of the envelope calculation and going by informed memory says that stocks generally return around 8-10% over most 10+ year periods. (Obviously not 2000-2010.) It's highly likely that you will get more than 1.66% by putting the proceeds of this debt into defensive stocks or even just doing straight up S&P 500. I know it might seem imprudent to borrow against your house and put it in Apple and Google (even I'm getting cold feet from the S&P because it seems shockingly un-diverse at this moment). So put it in a portfolio of 1/3 bonds and 2/3 stocks, or do VTSAX, or VEU. The point is, over 10+ year time horizons, it's very likely that you'll beat 1.66% by investing mostly in public equities. And the delta between your actual return and 1.66% is profit to you at capital gains rates, which are noticeably lower than ordinary income rates.

If it were me, given your profile, I'd jump on that mortgage and invest in something moderately ambitious like maybe $350k in VTSAX and $150k in utilities - maybe a tilt towards a total market fund but some ballast in a fund/ETF that doesn't wobble as much as the rest of the market (low beta). Heck, if you really wanted to lower your risk, you could buy high dividend yield right now and get 3.5%+ in just dividends. (Yes, the dividends could be lowered, but at this point a lot of the dividends have already been lowered - the risk of lowering further should be priced in using all available public information to gauge probabilities.)

Last point - I notice you haven't paid off the $19k in student loans, even though you have $690,000 sitting in taxable accounts. I'm guessing that's because you realize paying off 1.625% debt using money that is otherwise earning 10% per year in public markets is not going to flatter your net worth in the long run. Think about this home mortgage as scaling up the $19k in 1.625% debt to $500k in $1.66% debt (maybe 1.6% or less if you're in a high income tax state). Fund yourself with low-rate debt and buy high-growth assets. Leverage is like fire - keep it firmly under control, use it prudently, but do use it.
JBTX
Posts: 6983
Joined: Wed Jul 26, 2017 12:46 pm

Re: Rates so low. Should we take out a mortgage on home?

Post by JBTX »

At 37 with 3+ million, including $1.6m in market and real estate investments, I think you have plenty or risk investments already. Not sure why you'd want to borrow $400k more and throw it in the market.

If I were in your shoes I would want more liquidity, and having a 2.5% 30 year may be useful from that perspective, but I'd probably borrowenough to pay off the HELOC, plus another $100-$150k, and keep much of it in cash (or equivalents) and maybe some in conservative investments.
flaccidsteele
Posts: 1021
Joined: Sun Jul 28, 2019 9:42 pm
Location: Canada

Re: Rates so low. Should we take out a mortgage on home?

Post by flaccidsteele »

Are those rentals helping or hurting?

It’s unlikely that they’re helping, but the post doesn’t make it clear

$3.2m NW would be fine if it was all in low fee US index. But those rentals could be problematic

$1.3m in rentals could be a 12 unit MF generating $230k a year or it could be dead money that should be somewhere else

If it’s dead money, then that’s a significant fraction of the $3.2m ... that would be like weighing down a speedboat with boulders
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
Topic Author
tryingtogetahead
Posts: 79
Joined: Tue Apr 07, 2020 11:45 am

Re: Rates so low. Should we take out a mortgage on home?

Post by tryingtogetahead »

flaccidsteele wrote: Tue Aug 11, 2020 12:06 am Are those rentals helping or hurting?

It’s unlikely that they’re helping, but the post doesn’t make it clear

$3.2m NW would be fine if it was all in low fee US index. But those rentals could be problematic

$1.3m in rentals could be a 12 unit MF generating $230k a year or it could be dead money that should be somewhere else

If it’s dead money, then that’s a significant fraction of the $3.2m ... that would be like weighing down a speedboat with boulders
I have two rentals. One is 350k paid off earning 6.5% annually clean, and the other is 317k of equity on a 850k investment earning 3.2% clean.
RocketShipTech
Posts: 679
Joined: Sat Jun 13, 2020 10:08 pm

Re: Rates so low. Should we take out a mortgage on home?

Post by RocketShipTech »

If all you want is cheap loans, Interactive Brokers offers margin loans at 1.1% that you can withdraw as cash. At your income level you can deduct the investment interest so that your after-tax rate is something like 0.6%.

viewtopic.php?f=10&t=196884&p=5425590#p5425517

All you would need to do is sign up for an IB account through that link and transfer your taxable accounts to IB.
flaccidsteele
Posts: 1021
Joined: Sun Jul 28, 2019 9:42 pm
Location: Canada

Re: Rates so low. Should we take out a mortgage on home?

Post by flaccidsteele »

tryingtogetahead wrote: Tue Aug 11, 2020 12:31 am
flaccidsteele wrote: Tue Aug 11, 2020 12:06 am Are those rentals helping or hurting?

It’s unlikely that they’re helping, but the post doesn’t make it clear

$3.2m NW would be fine if it was all in low fee US index. But those rentals could be problematic

$1.3m in rentals could be a 12 unit MF generating $230k a year or it could be dead money that should be somewhere else

If it’s dead money, then that’s a significant fraction of the $3.2m ... that would be like weighing down a speedboat with boulders
I have two rentals. One is 350k paid off earning 6.5% annually clean, and the other is 317k of equity on a 850k investment earning 3.2% clean.
The second rental is definitely a slow grower. The leverage may make it tolerable after a couple decades, but it won’t go anywhere fast for awhile

Even the first rental is slowing down. Unless rent increases significantly faster than appreciation, that one will continue to slow as well

I have no problem seeking financing during these times, but only if I had an opportunity better than those rentals
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
User avatar
ohboy!
Posts: 286
Joined: Thu Jan 04, 2018 2:21 pm

Re: Rates so low. Should we take out a mortgage on home?

Post by ohboy! »

tryingtogetahead wrote: Mon Aug 10, 2020 10:39 pm DW and I are 37 years old, no kids yet but trying, live in MCOL area, 50-60k annual expenses, 550k total household income, and NW 3.25mm broken down as follows: RE equity 1.34mm (750k primary home with no mortgage but 105k drawn HELOC + 800k rental with 533k mortgage + 350k paid off rental + 75k RealtyShares crowdfunding investment), retirement accts 1.16mm, taxable accts 690k, private investment 16k (paying fixed 5%), misc 44k, cash 16k, and student loan (19k) (fixed 1.625% 25 yr loan).

Question: We played major defense early in our careers and paid off over 200k of student loans by age 29, our primary home mortgage by age 32, and one rental by age 36. Those turned out to be major mistakes given how the market has performed. Our only current debts are 105k HELOC on primary home, 533k mortgage on one rental, and 19k of student loans. We understand this creates sequence of return risk, but a bank quoted me 2.5% for a 30 year fixed mortgage of 510k on our primary residence. We would pay off the HELOC and have 405k left, which we would invest. I hate debt and crushed our debt over the years but these insanely low rates are killing me and making me want to take advantage of them. Otherwise, I feel like this is a missed opportunity. Thoughts?
Your username has me laughing
Topic Author
tryingtogetahead
Posts: 79
Joined: Tue Apr 07, 2020 11:45 am

Re: Rates so low. Should we take out a mortgage on home?

Post by tryingtogetahead »

flaccidsteele wrote: Tue Aug 11, 2020 12:48 am
tryingtogetahead wrote: Tue Aug 11, 2020 12:31 am
flaccidsteele wrote: Tue Aug 11, 2020 12:06 am Are those rentals helping or hurting?

It’s unlikely that they’re helping, but the post doesn’t make it clear

$3.2m NW would be fine if it was all in low fee US index. But those rentals could be problematic

$1.3m in rentals could be a 12 unit MF generating $230k a year or it could be dead money that should be somewhere else

If it’s dead money, then that’s a significant fraction of the $3.2m ... that would be like weighing down a speedboat with boulders
I have two rentals. One is 350k paid off earning 6.5% annually clean, and the other is 317k of equity on a 850k investment earning 3.2% clean.
The second rental is definitely a slow grower. The leverage may make it tolerable after a couple decades, but it won’t go anywhere fast for awhile

Even the first rental is slowing down. Unless rent increases significantly faster than appreciation, that one will continue to slow as well

I have no problem seeking financing during these times, but only if I had an opportunity better than those rentals
The 3.2% cap still has a 5% cash on cash return, which is nothing crazy, but not horrendous and it’s in an area I believe and hope will appreciate well over time. It’s a capital appreciation play and not an income play. The 6.5% cap is paid off so cash on cash is same as cap at 6.5%. We have family as tenants so unlikely I can increase rent but also decreases tenant issues and having to pay a realtor to find new tenants.
flaccidsteele
Posts: 1021
Joined: Sun Jul 28, 2019 9:42 pm
Location: Canada

Re: Rates so low. Should we take out a mortgage on home?

Post by flaccidsteele »

ohboy! wrote: Tue Aug 11, 2020 12:58 am
tryingtogetahead wrote: Mon Aug 10, 2020 10:39 pm DW and I are 37 years old, no kids yet but trying, live in MCOL area, 50-60k annual expenses, 550k total household income, and NW 3.25mm broken down as follows: RE equity 1.34mm (750k primary home with no mortgage but 105k drawn HELOC + 800k rental with 533k mortgage + 350k paid off rental + 75k RealtyShares crowdfunding investment), retirement accts 1.16mm, taxable accts 690k, private investment 16k (paying fixed 5%), misc 44k, cash 16k, and student loan (19k) (fixed 1.625% 25 yr loan).

Question: We played major defense early in our careers and paid off over 200k of student loans by age 29, our primary home mortgage by age 32, and one rental by age 36. Those turned out to be major mistakes given how the market has performed. Our only current debts are 105k HELOC on primary home, 533k mortgage on one rental, and 19k of student loans. We understand this creates sequence of return risk, but a bank quoted me 2.5% for a 30 year fixed mortgage of 510k on our primary residence. We would pay off the HELOC and have 405k left, which we would invest. I hate debt and crushed our debt over the years but these insanely low rates are killing me and making me want to take advantage of them. Otherwise, I feel like this is a missed opportunity. Thoughts?
Your username has me laughing
OP does it refer to Kramer from Seinfeld?

https://youtu.be/bU6m5UqLx9M
Last edited by flaccidsteele on Tue Aug 11, 2020 1:11 am, edited 1 time in total.
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
flaccidsteele
Posts: 1021
Joined: Sun Jul 28, 2019 9:42 pm
Location: Canada

Re: Rates so low. Should we take out a mortgage on home?

Post by flaccidsteele »

tryingtogetahead wrote: Tue Aug 11, 2020 1:04 am
flaccidsteele wrote: Tue Aug 11, 2020 12:48 am
tryingtogetahead wrote: Tue Aug 11, 2020 12:31 am
flaccidsteele wrote: Tue Aug 11, 2020 12:06 am Are those rentals helping or hurting?

It’s unlikely that they’re helping, but the post doesn’t make it clear

$3.2m NW would be fine if it was all in low fee US index. But those rentals could be problematic

$1.3m in rentals could be a 12 unit MF generating $230k a year or it could be dead money that should be somewhere else

If it’s dead money, then that’s a significant fraction of the $3.2m ... that would be like weighing down a speedboat with boulders
I have two rentals. One is 350k paid off earning 6.5% annually clean, and the other is 317k of equity on a 850k investment earning 3.2% clean.
The second rental is definitely a slow grower. The leverage may make it tolerable after a couple decades, but it won’t go anywhere fast for awhile

Even the first rental is slowing down. Unless rent increases significantly faster than appreciation, that one will continue to slow as well

I have no problem seeking financing during these times, but only if I had an opportunity better than those rentals
The 3.2% cap still has a 5% cash on cash return, which is nothing crazy, but not horrendous and it’s in an area I believe and hope will appreciate well over time. It’s a capital appreciation play and not an income play. The 6.5% cap is paid off so cash on cash is same as cap at 6.5%. We have family as tenants so unlikely I can increase rent but also decreases tenant issues and having to pay a realtor to find new tenants.
If you want to take out more debt for the same type of returns, that’s obviously a decision you’ll have to make

I would personally need something more compelling and would probably just keep looking
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
60B4E24B
Posts: 59
Joined: Tue Jul 16, 2019 8:55 pm

Re: Rates so low. Should we take out a mortgage on home?

Post by 60B4E24B »

boglemymind314 wrote: Mon Aug 10, 2020 11:10 pm
You're offered $500k or so of loan at 2.5% over a 30 year term. It looks like this will qualify for the home mortgage interest deduction. That means the interest will be in very large part paid for by 1-3 levels of government(s). At $550k of total household income you're probably already paying 35% in federal income taxes. So 35% of your 2.5% interest will be paid for by the feds. I don't what your state/local income taxes are but let's be conservative and say they're 0%. All the same, about 1/3 of your interest expense is now paid for by the feds. So your after-tax interest rate is really more like 1.66%.
You have to account for the standard deduction. If we assume $10k in SALT, the first $14k of interest paid per year is useless, since they could have gotten that by just taking the standard deduction.
euphonious
Posts: 26
Joined: Tue Aug 04, 2020 2:43 am

Re: Rates so low. Should we take out a mortgage on home?

Post by euphonious »

boglemymind314 wrote: Mon Aug 10, 2020 11:10 pm Two ways I think of this: one way is to ask will the collateral grow by at least 1.66%? Probably, more or less. 1.66% growth in real estate prices over 30 years is very normal. So you could borrow the money and at the end the growth in value of the asset would have matched the underlying interest rate you were paying on the debt. It's practically risk-less. (I realize there's a lot of Vegas houseflippers from 2006 who beg to differ.) Suppose home prices in your area grow at 2% over the next 30 years, which is hardly implausible - in that case, you've already come out ahead if you just stick the cash in a money market fund.
I'm probably missing something obvious here, but I'm not sure I understand how you arrived at this conclusion. The increase in value of the collateral would have happened regardless of whether or not the loan was taken out. Therefore, a comparison of the two outcomes would boil down to the rate of return on the loan vs the interest paid on the loan. Changes in the value of the collateral shouldn't affect the comparison, since it applies to both situations?
TimeTheMarket
Posts: 166
Joined: Fri Jan 25, 2019 8:49 am

Re: Rates so low. Should we take out a mortgage on home?

Post by TimeTheMarket »

unclescrooge wrote: Mon Aug 10, 2020 10:43 pm Based on your $3.2 m networth and $550k income, it won't make any difference one way or another.

I call this optimizing around the margins.

That being said, I just pulled out $500k home equity and invested it in my wife's business :mrgreen:
I agree. it's not really going to be meaningful down the line.

Historically yes you should do this and invest it. Assuming you don't value the hard-to-quantify freedom of being mortgage free (so I hear, anyway).

I'm not sure why twice in the past two days I've seen talk of the home mortgage deduction. For most people it's not a thing anymore.
Username is not serious :)
Osterix
Posts: 44
Joined: Sat Mar 03, 2018 8:55 am

Re: Rates so low. Should we take out a mortgage on home?

Post by Osterix »

tryingtogetahead wrote: Mon Aug 10, 2020 10:39 pm DW and I are 37 years old, no kids yet but trying, live in MCOL area, 50-60k annual expenses, 550k total household income, and NW 3.25mm broken down as follows: RE equity 1.34mm (750k primary home with no mortgage but 105k drawn HELOC + 800k rental with 533k mortgage + 350k paid off rental + 75k RealtyShares crowdfunding investment), retirement accts 1.16mm, taxable accts 690k, private investment 16k (paying fixed 5%), misc 44k, cash 16k, and student loan (19k) (fixed 1.625% 25 yr loan).

Question: We played major defense early in our careers and paid off over 200k of student loans by age 29, our primary home mortgage by age 32, and one rental by age 36. Those turned out to be major mistakes given how the market has performed. Our only current debts are 105k HELOC on primary home, 533k mortgage on one rental, and 19k of student loans. We understand this creates sequence of return risk, but a bank quoted me 2.5% for a 30 year fixed mortgage of 510k on our primary residence. We would pay off the HELOC and have 405k left, which we would invest. I hate debt and crushed our debt over the years but these insanely low rates are killing me and making me want to take advantage of them. Otherwise, I feel like this is a missed opportunity. Thoughts?
Maybe it is me just being simple, but I don't know why you would do this unless your goal is to have as large a net worth as possible.

Sure, you missed out on a significant bull run so you don't have as much as you could have had otherwise. However, if you look at your retirement alone (1.16 million by age 37), you and your spouse are killing it, even if this could be consider sub-par based on the 550K income. Sometimes simplicity is best instead of aiming for maximum efficiency. If y'all keep saving 20%+ for retirement for another 10 years, you are golden and can settle down by 50 with 2 million+.

The borrower is slave to the lender.

Good luck and great job so far!
ymmt
Posts: 35
Joined: Fri Jul 10, 2020 10:59 am

Re: Rates so low. Should we take out a mortgage on home?

Post by ymmt »

:sharebeer

Doing the complete opposite trade here, taking off levered bets and paying down my mortgage. Just handed in the final pmt check for my condo today actually. I'm just trying to reduce my ongoing expenses with this move.

There are easier ways to get leverage like getting a margin account or specialty ETFs, allowing you to get substantially the same exposure. Personally, I don't like recommending it since everyone's risk tolerances are different.
User avatar
grabiner
Advisory Board
Posts: 27953
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Rates so low. Should we take out a mortgage on home?

Post by grabiner »

boglemymind314 wrote: Mon Aug 10, 2020 11:10 pm Thoughts (worth what you paid for them):

You're offered $500k or so of loan at 2.5% over a 30 year term. It looks like this will qualify for the home mortgage interest deduction. That means the interest will be in very large part paid for by 1-3 levels of government(s). At $550k of total household income you're probably already paying 35% in federal income taxes. So 35% of your 2.5% interest will be paid for by the feds. I don't what your state/local income taxes are but let's be conservative and say they're 0%. All the same, about 1/3 of your interest expense is now paid for by the feds. So your after-tax interest rate is really more like 1.66%.
A home mortgage which is not used to buy, build, or improve the home is no longer deductible as mortgage interest. (If the HELOC was used to remodel the home and you refinance it into a mortgage, interest on the amount of the old HELOC is still deductible.)

It might be deductible as investment interest, if the proceeds are used to make investments. However, this deduction is also limited in value. If your investment interest exceeds your non-qualified dividends, you forfeit the benefit of the lower tax rate on any qualified dividends on which you take the deduction. And if you hold any tax-exempt bonds, the interest is prorated; if 10% of your portfolio is tax-exempt bonds, you can only deduct 90% of your investment interest.

In addition, as was mentioned elsewhere, you need to have itemized deductions over the standard deduction before you get any benefit. If you donate $14,800 to charity, then all your deductible interest actually gives you a benefit.
Wiki David Grabiner
User avatar
gr7070
Posts: 1467
Joined: Fri Oct 28, 2011 10:39 am

Re: Rates so low. Should we take out a mortgage on home?

Post by gr7070 »

No


I'm only typing more as the forum won't take no for an answer.

I'd happily pay extra on your current debt even. Especially considering your more than ample income which affords you to invest a great amount.

There's a reason why finance corporations pay out very low rates for guaranteed, long-term investment returns - they're worth a ton! with risk considered. Paying down debt is the same, yet, tax-free option.
stevekozak2
Posts: 74
Joined: Sun Dec 25, 2016 12:38 pm

Re: Rates so low. Should we take out a mortgage on home?

Post by stevekozak2 »

gr7070 wrote: Tue Aug 11, 2020 11:57 pm No


I'm only typing more as the forum won't take no for an answer.

I'd happily pay extra on your current debt even. Especially considering your more than ample income which affords you to invest a great amount.

There's a reason why finance corporations pay out very low rates for guaranteed, long-term investment returns - they're worth a ton! with risk considered. Paying down debt is the same, yet, tax-free option.
I agree.
Planner01
Posts: 246
Joined: Mon Dec 26, 2016 2:44 pm

Re: Rates so low. Should we take out a mortgage on home?

Post by Planner01 »

stevekozak2 wrote: Wed Aug 12, 2020 3:25 am [quote=gr7070 post_id=5427631 time=<a href="tel:1597208237">1597208237</a> user_id=31000]
No


I'm only typing more as the forum won't take no for an answer.

I'd happily pay extra on your current debt even. Especially considering your more than ample income which affords you to invest a great amount.

There's a reason why finance corporations pay out very low rates for guaranteed, long-term investment returns - they're worth a ton! with risk considered. Paying down debt is the same, yet, tax-free option.
I agree.
[/quote]
+1 100% agree!
Savermom
Posts: 45
Joined: Wed May 20, 2020 12:32 pm

Re: Rates so low. Should we take out a mortgage on home?

Post by Savermom »

Osterix wrote: Tue Aug 11, 2020 1:41 pm
tryingtogetahead wrote: Mon Aug 10, 2020 10:39 pm DW and I are 37 years old, no kids yet but trying, live in MCOL area, 50-60k annual expenses, 550k total household income, and NW 3.25mm broken down as follows: RE equity 1.34mm (750k primary home with no mortgage but 105k drawn HELOC + 800k rental with 533k mortgage + 350k paid off rental + 75k RealtyShares crowdfunding investment), retirement accts 1.16mm, taxable accts 690k, private investment 16k (paying fixed 5%), misc 44k, cash 16k, and student loan (19k) (fixed 1.625% 25 yr loan).

Question: We played major defense early in our careers and paid off over 200k of student loans by age 29, our primary home mortgage by age 32, and one rental by age 36. Those turned out to be major mistakes given how the market has performed. Our only current debts are 105k HELOC on primary home, 533k mortgage on one rental, and 19k of student loans. We understand this creates sequence of return risk, but a bank quoted me 2.5% for a 30 year fixed mortgage of 510k on our primary residence. We would pay off the HELOC and have 405k left, which we would invest. I hate debt and crushed our debt over the years but these insanely low rates are killing me and making me want to take advantage of them. Otherwise, I feel like this is a missed opportunity. Thoughts?
Maybe it is me just being simple, but I don't know why you would do this unless your goal is to have as large a net worth as possible.

Sure, you missed out on a significant bull run so you don't have as much as you could have had otherwise. However, if you look at your retirement alone (1.16 million by age 37), you and your spouse are killing it, even if this could be consider sub-par based on the 550K income. Sometimes simplicity is best instead of aiming for maximum efficiency. If y'all keep saving 20%+ for retirement for another 10 years, you are golden and can settle down by 50 with 2 million+.

The borrower is slave to the lender.

Good luck and great job so far!
+1
jharkin
Posts: 2596
Joined: Mon Mar 28, 2016 7:14 am
Location: Boston suburbs

Re: Rates so low. Should we take out a mortgage on home?

Post by jharkin »

RocketShipTech wrote: Mon Aug 10, 2020 10:45 pm
tryingtogetahead wrote: Mon Aug 10, 2020 10:39 pm We played major defense early in our careers and paid off over 200k of student loans by age 29, our primary home mortgage by age 32, and one rental by age 36. Those turned out to be major mistakes given how the market has performed.
A cautionary tale for all Bogleheads
Yet they have a 3 million NW at age 37. In their shoes I would already be retired.


If that’s a mistake, I need to try harder tomake some more mistakes!
SQRT
Posts: 1417
Joined: Sat Feb 05, 2011 9:44 am

Re: Rates so low. Should we take out a mortgage on home?

Post by SQRT »

My 37 year old self would definitely go for it (In fact I did borrow cheaply to buy div paying stock well into my ‘50’s). My 70 year old debt free retiree self would definitely not.
User avatar
bottlecap
Posts: 6538
Joined: Tue Mar 06, 2007 11:21 pm
Location: Tennessee

Re: Rates so low. Should we take out a mortgage on home?

Post by bottlecap »

Imagine doing this and having the real estate market and stock market fall by 50% in the next five years and take another 8 years to recover.

If you can mentally handle that scenario in the hopes of squeezing out a little extra return, go for it.

But, as pretty close to the top one percent at 37, you don’t need to do this.

JT
Grt2bOutdoors
Posts: 23052
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Rates so low. Should we take out a mortgage on home?

Post by Grt2bOutdoors »

You make $550 a year? You save what? $200k? Take the $200k and invest that. I wouldn’t borrow money against the house unless you had a guaranteed spread above you cost of capital, taxation and a big premium for the risk you take. It doesn’t sound like you have that. The broker on the other hand will surely make money off of you - that is a win for them.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
RocketShipTech
Posts: 679
Joined: Sat Jun 13, 2020 10:08 pm

Re: Rates so low. Should we take out a mortgage on home?

Post by RocketShipTech »

jharkin wrote: Wed Aug 12, 2020 6:33 am
RocketShipTech wrote: Mon Aug 10, 2020 10:45 pm
tryingtogetahead wrote: Mon Aug 10, 2020 10:39 pm We played major defense early in our careers and paid off over 200k of student loans by age 29, our primary home mortgage by age 32, and one rental by age 36. Those turned out to be major mistakes given how the market has performed.
A cautionary tale for all Bogleheads
Yet they have a 3 million NW at age 37. In their shoes I would already be retired.


If that’s a mistake, I need to try harder tomake some more mistakes!
I think OP is well aware that he would probably have 2x his net worth or more if he had leveraged up.

We don’t need to speculate whether that was a mistake for him or not, he has said so himself.
Dottie57
Posts: 9198
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: Rates so low. Should we take out a mortgage on home?

Post by Dottie57 »

Planner01 wrote: Wed Aug 12, 2020 3:36 am
stevekozak2 wrote: Wed Aug 12, 2020 3:25 am [quote=gr7070 post_id=5427631 time=<a href="tel:1597208237">1597208237</a> user_id=31000]
No


I'm only typing more as the forum won't take no for an answer.

I'd happily pay extra on your current debt even. Especially considering your more than ample income which affords you to invest a great amount.

There's a reason why finance corporations pay out very low rates for guaranteed, long-term investment returns - they're worth a ton! with risk considered. Paying down debt is the same, yet, tax-free option.
I agree.

+1 100% agree!
[/quote]

+1
000
Posts: 2805
Joined: Thu Jul 23, 2020 12:04 am

Re: Rates so low. Should we take out a mortgage on home?

Post by 000 »

tryingtogetahead wrote: Mon Aug 10, 2020 10:39 pm We played major defense early in our careers and paid off over 200k of student loans by age 29, our primary home mortgage by age 32, and one rental by age 36. Those turned out to be major mistakes given how the market has performed.
Look up "sunk cost fallacy".
itaos
Posts: 44
Joined: Tue Aug 10, 2010 10:58 am

Re: Rates so low. Should we take out a mortgage on home?

Post by itaos »

viewtopic.php?f=2&t=316064&p=5278151#p5278151

There are multiple discrepancies between these posts <3 months apart; I understand hiding your identity but what gives?
stoptothink
Posts: 8345
Joined: Fri Dec 31, 2010 9:53 am

Re: Rates so low. Should we take out a mortgage on home?

Post by stoptothink »

itaos wrote: Wed Aug 12, 2020 5:31 pm viewtopic.php?f=2&t=316064&p=5278151#p5278151

There are multiple discrepancies between these posts <3 months apart; I understand hiding your identity but what gives?
Like any other forum on the anonymous internet, I bet this happens a lot here.
kpeercy
Posts: 30
Joined: Sat Jul 02, 2016 6:04 am

Re: Rates so low. Should we take out a mortgage on home?

Post by kpeercy »

itaos wrote: Wed Aug 12, 2020 5:31 pm viewtopic.php?f=2&t=316064&p=5278151#p5278151

There are multiple discrepancies between these posts <3 months apart; I understand hiding your identity but what gives?
Excellent question. Clearly some sort of shenanigans going on.
willyd123
Posts: 172
Joined: Mon Feb 19, 2018 7:23 am

Re: Rates so low. Should we take out a mortgage on home?

Post by willyd123 »

I am in my late 50s and paid off my mortgage when I was 45. If I had to do over again, I would have maintained a mortgage and set aside the full mortgage amount in an account and would have invested the assets mostly in equities. Of course, I now have the benefit of hindsight but if your timeframe is more than 10 years, I would be extremely confident you'll earn more on your mortgage earmarked assets than you'd save in interest payments.
Post Reply