Would you invest equity from a house ?

[newguy123]

My house is paid off and I am a step away from doing a cash out refinance and then investing the amount from the refinance. The rate I have to beat is 2.99 (apy) which seems pretty easy to beat but at the same time I hear the greats such as Warren Buffet always say “don’t risk what you have for what you don’t need”. Basically I’d be risking my paid off house for more returns, return wise I think I would be ok with putting the money from the refi into a typical boggle head split of bonds and stocks for 30 years. At the same time I am getting cold feet because there are many what if’s , like what if I lose my job or what if the market tanks etc. what are your guys thoughts ? This all started because I told my friend my house is paid off and they told me I was stupid not to invest the money and to not tie it up in the house

[megabad]

Ultimately leverage is leverage to me. I think you are asking the right quesions and it definitely has risks and I think the longer your holding period and the smaller the relative amount, the better I feel about it. Of course most people (overwhelmingly) do not hold mortgages very long.

[lessismore22]

We'd need a little more background on your situation to give any specific advice.

How much of your NW does the home equity represent?

[newguy123]

We'd need a little more background on your situation to give any specific advice.

How much of your NW does the home equity represent?

About ~40% of my net worth.

Ultimately leverage is leverage to me. I think you are asking the right quesions and it definitely has risks and I think the longer your holding period and the smaller the relative amount, the better I feel about it. Of course most people (overwhelmingly) do not hold mortgages very long.

True it is a conventional loan with no prepay penalties so I could pay it off early. Just depends on the market too, if the market goes down I will have to hold longer. The big worry I have is if the economy somehow goes down and I lose my job and also the market tanks

[retiredjg]

I would not do it.

Instead of investing the equity from your house, how about investing the payments you would be making to pay a mortgage?

[Broken Man 1999]

Only if via a reverse mortage. But, I have no reverse mortgage.

Broken Man 1999

[luckyducky99]

You can get leverage for cheaper than 3%. For example by using margin at some brokerages. Or with options or futures.

putting the money from the refi into a typical boggle head split of bonds and stocks for 30 years

You'd be borrowing at 3% to put some of that money towards bonds yielding less than 3%. That doesn't make much sense.
Do you have a reason why you'd do that?

By leveraging, you're basically saying, "I'm willing to take more risk." This part you acknowledge. But you could also just increase your stock allocation, and not have to pay any interest for the privilege of doing that.

[Toons]

Would "I" borrow money to invest?
No

[newguy123]

I would not do it.

Instead of investing the equity from your house, how about investing the payments you would be making to pay a mortgage?

This is good advice, thanks ! I didn’t think of it this way

You can get leverage for cheaper than 3%. For example by using margin at some brokerages. Or with options or futures.

[quote=newguy123 post_id=5582527 time=<a href="tel:1604440852">1604440852</a> user_id=166596]
putting the money from the refi into a typical boggle head split of bonds and stocks for 30 years


You'd be borrowing at 3% to put some of that money towards bonds yielding less than 3%. That doesn't make much sense.
Do you have a reason why you'd do that?

By leveraging, you're basically saying, "I'm willing to take more risk." This part you acknowledge. But you could also just increase your stock allocation, and not have to pay any interest for the privilege of doing that.

I was thinking interest rates were going to go up after the presidential election etc , my thoughts on this is that the rates are historically low, good time to borrow cheap and invest for a quick return. The problem with broker margin is I could be forced to sell with margin calls. With a 30 year fixed mortgage I was thinking no margin call and can hold as long as I am making payments

[megabad]

I was thinking interest rates were going to go up after the presidential election etc , my thoughts on this is that the rates are historically low, good time to borrow cheap and invest for a quick return.

Be careful with this logic. Rates were “historically low” and “headed nowhere but up” 20 years ago. That didn’t pan out like a lot of people thought. The same thing goes for predicting portfolio returns. Your use of the phrase “quick return” leans me more toward advising against the use of leverage. Quick return and leverage = gambling to me. I use leverage but I’m playing the card counting slow game of odds instead of throwing all the loan sharks money on black in one go. I may lose, but I’m not overly exposed and certainly not expecting a quick return.

[Nicolas]

I wouldn’t do it. I like being debt free, it’s the best feeling.

[7eight9]

Do you need to gamble to get where you want to be? If you do then pick up the dice and toss them. Otherwise I'm not sure I see the point.

[grettman]

Never. No way. Not a chance. Negative on that.

[newguy123]

I was thinking interest rates were going to go up after the presidential election etc , my thoughts on this is that the rates are historically low, good time to borrow cheap and invest for a quick return.

Be careful with this logic. Rates were “historically low” and “headed nowhere but up” 20 years ago. That didn’t pan out like a lot of people thought. The same thing goes for predicting portfolio returns. Your use of the phrase “quick return” leans me more toward advising against the use of leverage. Quick return and leverage = gambling to me. I use leverage but I’m playing the card counting slow game of odds instead of throwing all the loan sharks money on black in one go. I may lose, but I’m not overly exposed and certainly not expecting a quick return.

True I would be pretty exposed with a refi, right now I am debt free and investing any free cash I have, even if I lose and my portfolio goes to 0, I still have my house which is why I am getting cold feet on pulling the trigger on the refi

I wouldn’t do it. I like being debt free, it’s the best feeling.

Yep been debt free for the last 7 years after paying off college loan. The problem is , I am starting to view the paid off house as dead money which is not invested

[L82GAME]

According to Webster’s Dictionary, Equity is:

2a : the money value of a property or of an interest in a property in excess of claims or liens against it

Trade hard earned freedom from claims or liens in favor of re-indebtedness? No thank you.

[wander]

Why didn't you applied for 30-year mortgage so you don't have to think about it now?

[newguy123]

Why didn't you applied for 30-year mortgage so you don't have to think about it now?

I was self employed back then fresh out of college, hard to get a good mortgage back then versus now

[260chrisb]

I would not do it.

Instead of investing the equity from your house, how about investing the payments you would be making to pay a mortgage?

Yes, this! Greed is a terrible thing. This is 40% of your NW; why would you want to add risk. Invest all you want but not with borrowed money. Bad idea.

[Nate79]

Are you 100% stocks in your asset allocation already? If not then that should be your first step. If you can't handle 100% stock then you need to rethink this idea.

[fyre4ce]

This strategy is adding a lot of risk. Having a large required payment in your budget with your house as collateral could backfire in all sorts of ways. You’re going to pay more interest than equivalent risk bonds are paying right now, so you either need to invest in stocks or other risky assets to make the arbitrage go in your favor, and/or make a long-term bet on interest rates. Neither long-term stock performance nor rising interest rates are anywhere close to guaranteed. Plus there’s cost (eg. appraisal) and hassle associated with originating the loan. And with less equity, you can borrow less in the future if you need cash in an emergency. Do you have a financial need to take on this risk? I wouldn’t do it unless I had a need for leveraged returns, which most people don’t. In situations like this, I tend to think of being debt-free as a luxury that you can afford (I assume). Sure, it may cost you more than a maximally leveraged portfolio, but it has some really nice benefits like simplicity, flexibility, and lower risk.

If you want to leverage, what about buying a rental property or two?

[newguy123]

This strategy is adding a lot of risk. Having a large required payment in your budget with your house as collateral could backfire in all sorts of ways. You’re going to pay more interest than equivalent risk bonds are paying right now, so you either need to invest in stocks or other risky assets to make the arbitrage go in your favor, and/or make a long-term bet on interest rates. Neither long-term stock performance nor rising interest rates are anywhere close to guaranteed. Plus there’s cost (eg. appraisal) and hassle associated with originating the loan. And with less equity, you can borrow less in the future if you need cash in an emergency. Do you have a financial need to take on this risk? I wouldn’t do it unless I had a need for leveraged returns, which most people don’t. In situations like this, I tend to think of being debt-free as a luxury that you can afford (I assume). Sure, it may cost you more than a maximally leveraged portfolio, but it has some really nice benefits like simplicity, flexibility, and lower risk.

If you want to leverage, what about buying a rental property or two?

I was thinking about this as well, it would be a mortgage against the rental property correct ? As opposed to a refi loan with my house as collateral

[Raymond]

...This all started because I told my friend my house is paid off and they told me I was stupid not to invest the money and to not tie it up in the house

Has your friend paid his house off?

How well is his financial life organized? Does he have a lot of debt?

If the answers to those questions are, "Not very well" and "He owes money on a bunch of stuff", then you might consider whether his advice is worth taking.

Even if he has his stuff together, I still think his advice is not worth taking

Tell him that if you do as he suggests and it goes wrong, you are expecting him to make up the difference.

[retire2022]

Op

Like others who chimed in I concur this is not advisable.

Your mutual funds/ETFs or securities could be less than what you used borrowed funds for and it may bankrupt you.

It is like buying a used car which depreciates, which you still owe the original loan on.

If you use margin loan from your brokerage, they could call the loan in and force a sale less than what you brought it at.

I did this 32 years ago when I had a full brokerage account with Dean Witter Reynolds (now part of Merrill Lynch), when the price dropped the brokerage sold off my securities at a lost and I still owed the loan.

What would you had done if you held securities on March 23, 2020 when it lost 30% of its value? and still owe the original cost of borrowed money?

[retiredjg]

The problem is , I am starting to view the paid off house as dead money which is not invested.

Stop doing that. View it as a home. The place you can be no matter what.

Viewing it as "dead money" is viewing it from a standpoint of greed. Fear and greed are the cause of almost all investing mistakes. We are all subject to those things....just don't go there.

[Nicolas]

Yep been debt free for the last 7 years after paying off college loan.

Me, 17 years. No desire to go back into debt.

[fyre4ce]

Op

Like others who chimed in I concur this is not advisable.

Your mutual funds/ETFs or securities could be less than what you used borrowed funds for and it may bankrupt you.

It is like buying a used car which depreciates, which you still owe the original loan on.

If you use margin loan from your brokerage, they could call the loan in and force a sale less than what you brought it at.

I did this 32 years ago when I had a full brokerage account with Dean Witter Reynolds (now part of Merrill Lynch), when the price dropped the brokerage sold off my securities at a lost and I still owed the loan.

What would you had done if you held securities on March 23, 2020 when it lost 30% of its value? and still owe the original cost of borrowed money?

I believe he's talking about borrowing against his house (ie. mortgage) rather than against securities (ie. margin loan). Mortgages don't have the call risk of margin loans, so if he's going to borrow money to invest, a mortgage is probably the best way to do it. Mortgages are also fixed rate, whereas margin loans are typically variable. But leveraging with a mortgage still has some significant risks. The biggest is the large fixed payment every month that constrains cashflow. There's also the risk that the value of the assets bought on leverage and/or the home could drop, possibly a lot. It also reduces the amount that can be borrowed against the house in an emergency, if the primary mortgage funds are tied up in illiquid/volatile assets. It's not the craziest idea I've ever heard, but it's not a level of risk I would choose to take on, without a clear need. "My friend said having a paid off house is a bad idea" is not a convincing reason to me to go down this route. As others have said, it's probably a bad idea, but without knowing details of the OP's financial situation it's hard to say for sure.

I stand by the idea that for the OP, being debt-free is (most likely) a luxury he can afford.

One other aspect that's been overlooked is asset protection. OP, is home equity protected from creditors in your state? If so, stripping home equity to make taxable investments (which aren't protected from creditors in any state AFAIK) is also adding an asset protection risk. If home equity is not protected, or up to some low limit, then the asset protection impact could be small.

[260chrisb]

The problem is , I am starting to view the paid off house as dead money which is not invested.

Stop doing that. View it as a home. The place you can be no matter what.

Viewing it as "dead money" is viewing it from a standpoint of greed. Fear and greed are the cause of almost all investing mistakes. We are all subject to those things....just don't go there.

I'd be curious to know the value of this paid off home and what made the OP pay it off in the first place? I suspect as one ages "dead" money isn't as big a deal as it is when you are young. I remained fully invested for years and years as I to wasn't comfortable with "dead" money either but as I got older, bought a home, and started seeing retirement 4-5 years out I got over it. Now I've got plenty of dead money in my home, in my emergency fund, in my HSA, and in my checking account and an good with it. I've got plenty still at risk of course for future growth but have no need for greed. The age old question is always when is enough, enough and why risk a paid off asset (that is likely slowly going up in value so it's not really "dead") for higher returns?

[fyre4ce]

This strategy is adding a lot of risk. Having a large required payment in your budget with your house as collateral could backfire in all sorts of ways. You’re going to pay more interest than equivalent risk bonds are paying right now, so you either need to invest in stocks or other risky assets to make the arbitrage go in your favor, and/or make a long-term bet on interest rates. Neither long-term stock performance nor rising interest rates are anywhere close to guaranteed. Plus there’s cost (eg. appraisal) and hassle associated with originating the loan. And with less equity, you can borrow less in the future if you need cash in an emergency. Do you have a financial need to take on this risk? I wouldn’t do it unless I had a need for leveraged returns, which most people don’t. In situations like this, I tend to think of being debt-free as a luxury that you can afford (I assume). Sure, it may cost you more than a maximally leveraged portfolio, but it has some really nice benefits like simplicity, flexibility, and lower risk.

If you want to leverage, what about buying a rental property or two?

I was thinking about this as well, it would be a mortgage against the rental property correct ? As opposed to a refi loan with my house as collateral

My suggestion was something like putting 20% down on a rental property. It would require a cash investment (the 20% down, plus closing costs) but you'd be leveraging the value of that property 5:1. It may or may not be cashflow-positive at 20% down (experienced RE investors tell me you typically need more equity to be cashflow-positive, but it does depend on the property and market), but would certainly be better cashflow-wise than leveraging a mortgage to buy stocks. This still has risks, but less than mortgaging your house IMO. Worst-case, you lose the rental property to a foreclosure, which is a lot better than losing your home. And if you already own a lot of stocks (which I presume you do if you're considering this plan) then diversifying into real estate has a benefit over just more stocks.

[megabad]

Worst-case, you lose the rental property to a foreclosure, which is a lot better than losing your home.

Unless you state has homestead protections, I don’t agree that this is true. In some cases, even if it does, I don’t agree this is true.

[fyre4ce]

Worst-case, you lose the rental property to a foreclosure, which is a lot better than losing your home.

Unless you state has homestead protections, I don’t agree that this is true. In some cases, even if it does, I don’t agree this is true.

Fair enough, but I think this depends on whether the mortgage is recourse or non-recourse, which depends on the state. According to Forbes, 12 states have non-recourse mortgages, including mine. I assumed this also applies to investment properties, but please correct me if I'm wrong.

[megabad]

Fair enough, but I think this depends on whether the mortgage is recourse or non-recourse, which depends on the state. According to Forbes, 12 states have non-recourse mortgages, including mine. I assumed this also applies to investment properties, but please correct me if I'm wrong.

This is a good point. I wasn’t even thinking that complicated. My unstated point was that it ruins your credit. So that comes along as the “worst” and can have pretty bad consequences especially for over leveraged individuals. Nothing like having all your HELOCs and credit cards closed during a major renovation project...this happened to more than one real estate investor friend I had after the recession. One of the reasons I suggested to not get over exposed in general.

[unclescrooge]

My house is paid off and I am a step away from doing a cash out refinance and then investing the amount from the refinance. The rate I have to beat is 2.99 (apy) which seems pretty easy to beat but at the same time I hear the greats such as Warren Buffet always say “don’t risk what you have for what you don’t need”. Basically I’d be risking my paid off house for more returns, return wise I think I would be ok with putting the money from the refi into a typical boggle head split of bonds and stocks for 30 years. At the same time I am getting cold feet because there are many what if’s , like what if I lose my job or what if the market tanks etc. what are your guys thoughts ? This all started because I told my friend my house is paid off and they told me I was stupid not to invest the money and to not tie it up in the house

I agree with your friend.

I have previously, and have currently pulled equity from my home to invest. Borrowing money under 4% is essentially free money. I wouldn't even bother making extra principle payments on any loan.

But doing anything because a friend recommended is something your mother surely must have warned you against?

[fyre4ce]

Fair enough, but I think this depends on whether the mortgage is recourse or non-recourse, which depends on the state. According to Forbes, 12 states have non-recourse mortgages, including mine. I assumed this also applies to investment properties, but please correct me if I'm wrong.

This is a good point. I wasn’t even thinking that complicated. My unstated point was that it ruins your credit. So that comes along as the “worst” and can have pretty bad consequences especially for over leveraged individuals. Nothing like having all your HELOCs and credit cards closed during a major renovation project...this happened to more than one real estate investor friend I had after the recession. One of the reasons I suggested to not get over exposed in general.

Real estate tends to be less volatile than stocks, which is another reason why I'd say an 80% LTV rental property is lower risk than leveraging stocks with a mortgage on OP's primary home.

[Wricha]

Given 40% net worth is house equity. I think borrowing that much money to invest is awful idea. A paid off house is a good pillow to sleep on.

[DesertDiva]

My house is paid off and I am a step away from doing a cash out refinance and then investing the amount from the refinance. The rate I have to beat is 2.99 (apy) which seems pretty easy to beat but at the same time I hear the greats such as Warren Buffet always say “don’t risk what you have for what you don’t need”. Basically I’d be risking my paid off house for more returns, return wise I think I would be ok with putting the money from the refi into a typical boggle head split of bonds and stocks for 30 years. At the same time I am getting cold feet because there are many what if’s , like what if I lose my job or what if the market tanks etc. what are your guys thoughts ? This all started because I told my friend my house is paid off and they told me I was stupid not to invest the money and to not tie it up in the house

First of all, its best not to share financial details with friends. Since that bridge has already been crossed, ask your friend if you can live with him if his plan for you doesn’t work as expected. He's likely telling you what he would do in your shoes, but that doesn’t make it a good idea.

The idea to pour a potential mortgage payment into investments is smart because you won’t be putting your paid-off, mortgage-free, owner-occupied Home on the line.

[GuySmiley]

If you feel you are not taking enough risk, just adjust your AA instead. Lower chance of catastrophic results that way.

[luckyducky99]

putting the money from the refi into a typical boggle head split of bonds and stocks for 30 years

my thoughts on this is that the rates are historically low, good time to borrow cheap and invest for a quick return.

You're kind of all over the place. You say you want to borrow to invest "for 30 years" but also make "a quick return."

You want to borrow at 3% and invest some of it in bonds yielding less than that.

We also don't know what your asset allocation or risk tolerance is. This is the most important thing. If you're less than 100% stocks, leverage is rarely recommended.

If you decide that you can handle more risk than 100% stocks, then you should figure out how much leverage you want. Then figure out the best way to get it. Maybe that's a cash out refi, maybe something else. But sit down and think it through. Don't assume that your friend is right or even knows what they're talking about.

[tmcc]

IBKR margin loans are cheaper than HELOC and mortgage rates for almost any balance

this is a risky maneuver. good luck

https://www1.interactivebrokers.com/en/ ... hp?f=46376

[mrmass]

I'd consider it only if you don't care or provide for anyone but yourself, and nobody cares about you or relies on this property for shelter aside from you.

[Mike Scott]

I would not take equity out of my house or borrow money to invest.
However, I am OK letting the mortgage at 2.5% keep running long term while investing the $$ it would take to pay it off early.
You might argue there is no or little difference and you might be right.

I am doing this partly for liquidity reasons and partly because I do believe I can make more than 2.5% return. At some point in time, I will have the ability to pay off the entire mortgage balance if I choose to then or not. Will have to wait and see how that goes.

I must also say that I have had a change of perception about owning property. I've swung to the perspective that owning property outright is a bit of an illusion when there is a significant tax bill each year. Ownership is absolutely more stable than a rental but I will never own this property absolutely, fully and completely as long as property tax bills and tax liens exist.

[ClevrChico]

Leverage is great until it blows up. Hard pass.

[Bernard]

No.
I would pretend I still have a mortgage and transfer the amount into an retirement account each month. Something bad can happy to you at any time and the last thing you, or your spouse, should have to deal with at that time is keeping a roof over your head.

[JediMisty]

My house is paid off and I am a step away from doing a cash out refinance and then investing the amount from the refinance. The rate I have to beat is 2.99 (apy) which seems pretty easy to beat but at the same time I hear the greats such as Warren Buffet always say “don’t risk what you have for what you don’t need”. Basically I’d be risking my paid off house for more returns, return wise I think I would be ok with putting the money from the refi into a typical boggle head split of bonds and stocks for 30 years. At the same time I am getting cold feet because there are many what if’s , like what if I lose my job or what if the market tanks etc. what are your guys thoughts ? This all started because I told my friend my house is paid off and they told me I was stupid not to invest the money and to not tie it up in the house

In 1999, I sold my paid off house that I owned with my former husband. I was buying another home with my then fiance. I only put enough down from the proceeds for my share of 20% down, because he couldn't afford to pay cash as the proceeds from the sale of his place mostly went to his ex-wife. I DCA much of the proceeds into investments, which did quite poorly over the next few years (the lost decade). Luckily, I didn't withdraw any of that money, but it took years just to get back to my original investments. I would not do it again. Sure, we've had a great market this last decade, but it has not always been the case.

[prairieman]

Listen to Peter Schiff and see if you still are interested in doing it.

[grabiner]

Yep been debt free for the last 7 years after paying off college loan. The problem is , I am starting to view the paid off house as dead money which is not invested

It isn't dead money. It is paying you every month, because it allows you to live in a house without paying any rent on it.

And if you hold any bonds yielding less than the loan rate, you can get a better return with no more risk by selling those bonds to buy stocks, rather than borrowing money. (Any bonds yielding more than 2.99% are substantially riskier than your loan; for example, Vanguard Long-Term Corporate Bond Index, with a 3.06% yield, holds half BBB bonds and has a 15-year duration.)

[willthrill81]

Listen to Peter Schiff and see if you still are interested in doing it.

He's a gold bug's gold bug.

[TropikThunder]

Isn’t it a sure sign of a coming crash when people ask about pulling their home equity out to invest it in stocks?

[anoop]

Isn’t it a sure sign of a coming crash when people ask about pulling their home equity out to invest it in stocks?

Crashes are from a different era. We are crash proof now.

[unclescrooge]

Listen to Peter Schiff and see if you still are interested in doing it.

He's a gold bug's gold bug.

He makes Marc Faber look like an optimist.

[mmmodem]

I would and I do. Holding onto my 30 year mortgage as long as possible. We have the amount to pay it off but choosing to invest it instead. I accept the risk. I also see risk in having a large portion of my asset on a single piece of property. Being debt free brings me no extra peace. Being in debt brings me no extra grief. It's automatically pushed monthly from my bank account. I give it no extra thought.