How to invest $200k (from 2.25% cash out refinancing)?

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White Coat Investor
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by White Coat Investor »

vineviz wrote: Tue Dec 29, 2020 7:24 pm
alexL wrote: Tue Dec 29, 2020 6:43 pm The interests are so ridiculously low so I decided to take a portion of my equity out while doing refinancing.

I am getting a 2.25% 15-year loan. $200K of the loan is cash out.

I already max out my 401k and IRA for many years. I also have some taxable accounts with half stock index and half bond index.

What would be your suggestions for investing the 200k?
Pay off the mortgage:)

Why are you paying 2.25% on the mortgage while earning roughly 1% on your bond index fund?
My thoughts exactly. If I had $200K I wasn't sure what to do with and a $200K mortgage, I'd pay off the mortgage and earn a guaranteed 2.25% on that money. Way better than the yield on any other safe investment right now.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by 000 »

It seems OP has learned the wrong lesson and is now going to do something even worse: increasing stock allocation, on leverage. We weren't telling you to buy more stocks on leverage (debt), we were saying that it probably didn't make sense to take a cash out refinance to begin with.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Toons »

Pay It Off

:wink:
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ivgrivchuck
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by ivgrivchuck »

Taylor Larimore wrote: Thu Dec 31, 2020 10:37 am
Why are you paying 2.25% on the mortgage while earning roughly 1% on your bond index fund?
Bogleheads:

This year Vanguard's Total Bond Market Index Fund returned 7.62% and Total Stock Market returned 20.04%.

Anyone who took out a mortgage on their home and put it into stocks, bonds or preferably both, did far better than having their money locked in home equity.
This is exactly how things looked like in 1998-2000. And what happened to all those people who took out loans against their houses to put more money into the market?

Technically there is nothing wrong with using your house equity to get more market exposure. The problem is that people mostly do it when markets are in all-time highs, and rarely do it when they are in their 10-year lows...

The net result is devastating for a retail investor.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Horton »

Why not just go from 70/30 to 90/10 (or 100% equities) rather than take out a loan?
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by placeholder »

ivgrivchuck wrote: Thu Dec 31, 2020 8:42 pm If you have any money in bonds in taxable, you are always better off by liquidating those bonds and using the money paying off the mortgage, because the expected return on bonds (~1.1%) is lower than your mortgage rate (2.25%).
Is that what you would advise for someone with an existing mortgage and investing new money from salary that is go 100% stock until the mortgage is paid off in 30 years?
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alexL
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by alexL »

ivgrivchuck wrote: Thu Dec 31, 2020 8:42 pm
alexL wrote: Tue Dec 29, 2020 6:43 pm
The question is what to invest with additional $200K taken out from my $600K home equity at rate 2.25%? Or any adjustments to my overall investment plan?
Mathematically the only way this makes sense is that you invest 100% in stocks. Because stocks have a higher expected return than what you pay for mortgage.

If you have any money in bonds in taxable, you are always better off by liquidating those bonds and using the money paying off the mortgage, because the expected return on bonds (~1.1%) is lower than your mortgage rate (2.25%).

Another alternative might be Real Estate. Buy another house, and lease it? Maybe the expected return is higher than 2.25%?

Many comments in this thread may be harsh, but they are just trying to tell that your plan doesn't make much sense financially...
Thank you. I appreciate anyone who spends time on this topic. Harsh comments are welcome also.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by lakpr »

placeholder wrote: Thu Dec 31, 2020 8:56 pm
ivgrivchuck wrote: Thu Dec 31, 2020 8:42 pm If you have any money in bonds in taxable, you are always better off by liquidating those bonds and using the money paying off the mortgage, because the expected return on bonds (~1.1%) is lower than your mortgage rate (2.25%).
Is that what you would advise for someone with an existing mortgage and investing new money from salary that is go 100% stock until the mortgage is paid off in 30 years?
Not @ivgrivchuck, but I would say yes. At least recognize that, by investing in bonds in a 401k or IRA, you are arbitraging against yourself, and decide that it is worth paying the premium (in terms of spread between the bond fund SEC yield and the mortgage rate) for the sake of liquidity.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by ivgrivchuck »

placeholder wrote: Thu Dec 31, 2020 8:56 pm
ivgrivchuck wrote: Thu Dec 31, 2020 8:42 pm If you have any money in bonds in taxable, you are always better off by liquidating those bonds and using the money paying off the mortgage, because the expected return on bonds (~1.1%) is lower than your mortgage rate (2.25%).
Is that what you would advise for someone with an existing mortgage and investing new money from salary that is go 100% stock until the mortgage is paid off in 30 years?
What I would advice them is:

1) Have a big enough emergency fund or liquidity fund (This can be a low risk bond fund)

2) Based on their risk tolerance divide their extra income into two buckets:
a) stocks
b) pay back mortgage quicker

If person's normal AA is 80/20, I would recommend splitting their money maybe 60/40 or 50/50 between stocks and house equity, because they are more leveraged.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by placeholder »

Well I think having a mortgage and 100% stocks would be a poor portfolio and I almost never see that recommended here and it is why I always ignored the home equity and the loan and only considered the investable assets when developing my asset allocation.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Ron Ronnerson »

placeholder wrote: Thu Dec 31, 2020 9:59 pm Well I think having a mortgage and 100% stocks would be a poor portfolio and I almost never see that recommended here and it is why I always ignored the home equity and the loan and only considered the investable assets when developing my asset allocation.
I was wondering the same thing. In fact, the recommendation often made to people on this forum is that it’s wise to hold some bonds for various reasons (diversification, efficient frontier, having dry powder, ability to rebalance, being able to deal with market drops easier, mitigating sequence of return risk to a greater degree, etc). This is regardless of whether or not someone has a mortgage. In cases where the mortgage rate is in the 2% range, I tend to see responses recommending investing at a person’s chosen asset allocation rather than being in a hurry to pay down the mortgage.

It could be that maybe I’m misunderstanding something here. Are people saying that anyone who has a mortgage at current rates should go 100% stocks and direct what they would have put into bonds at the mortgage instead? Should people sell bonds they currently hold (assuming tax consequences aren’t a factor) in order to speed up paying down a mortgage at, say, 2.25%?
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Dottie57 »

Horton wrote: Thu Dec 31, 2020 8:53 pm Why not just go from 70/30 to 90/10 (or 100% equities) rather than take out a loan?
+1
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Valueinvestor2 »

hightower wrote: Thu Dec 31, 2020 10:54 am
Valueinvestor2 wrote: Tue Dec 29, 2020 7:59 pm
alexL wrote: Tue Dec 29, 2020 6:43 pm The interests are so ridiculously low so I decided to take a portion of my equity out while doing refinancing.

I am getting a 2.25% 15-year loan. $200K of the loan is cash out.

I already max out my 401k and IRA for many years. I also have some taxable accounts with half stock index and half bond index.

What would be your suggestions for investing the 200k?
I don’t disagree with this approach. Seems a little ridiculous that you are being criticized. Math is math. A dummy can make 7% annualized in index funds over the long haul and you are paying 2.25%. It’s math.

Obviously some things to consider are income security and how long you plan to stay in the house.

Personally I am not doing this now bc I buy individual companies and right now I don’t see any great opportunities. If the market dips it’s a no brainer IMO. Again, math is math.
Yeah and a lot of those "dummies" tried to make 7% returns with index funds in 2007 and did exactly as the OP described. Then the housing market and stocks did a nose dive and they were suddenly underwater on the mortgage and out of work...foreclosures through the roof. Not a guarantee you'll make anything in the stock market, so borrowing that much money to try and invest it is foolish in my book.
Well if those “dummies” stuck to their plan how would they be doing as of December 31, 2020?

Answer: pretty damn good.

It’s math. Very simple math. Again, any bogleheads want to debate math?
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by ivgrivchuck »

Ron Ronnerson wrote: Thu Dec 31, 2020 10:44 pm
placeholder wrote: Thu Dec 31, 2020 9:59 pm Well I think having a mortgage and 100% stocks would be a poor portfolio and I almost never see that recommended here and it is why I always ignored the home equity and the loan and only considered the investable assets when developing my asset allocation.
It could be that maybe I’m misunderstanding something here. Are people saying that anyone who has a mortgage at current rates should go 100% stocks and direct what they would have put into bonds at the mortgage instead? Should people sell bonds they currently hold (assuming tax consequences aren’t a factor) in order to speed up paying down a mortgage at, say, 2.25%?
Yes. As long as you keep enough liquidity for your short term and mid term needs.

Bonds pay around 1%. Mortgage takes around 2.5%. That's negative arbitrage. Minimize it, but keep enough liquidity.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by placeholder »

^^^ I think that's poor advice and I rarely see it suggested in portfolio reviews.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by 000 »

placeholder wrote: Fri Jan 01, 2021 2:12 am ^^^ I think that's poor advice and I rarely see it suggested in portfolio reviews.
You rarely see it because many posters don't seem to understand the difference between bond past returns and current yields.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by placeholder »

000 wrote: Fri Jan 01, 2021 2:17 am
placeholder wrote: Fri Jan 01, 2021 2:12 am ^^^ I think that's poor advice and I rarely see it suggested in portfolio reviews.
You rarely see it because many posters don't seem to understand the difference between bond past returns and current yields.
Current yields are what they are and can change in the future it doesn't make much sense to fixate on that when you can use cheap leverage to improve your portfolio.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Ron Ronnerson »

placeholder wrote: Fri Jan 01, 2021 2:12 am ^^^ I think that's poor advice and I rarely see it suggested in portfolio reviews.
Exactly, yet it’s been stated a lot in this thread. I’m trying to figure out the reason for the discrepancy. I am wondering if the advice would have been the same if the OP had not stated that they had $200k in cash due to taking it out of the house but had instead just said “I’ve got $200k laying around and am wondering what to do with it. By the way, I’ve got a mortgage at 2.25% and have a fair bit of equity in the house.” Based on past posts I’ve seen, I believe that many would say to invest but not likely at 100% equities.

Whenever someone is investing while having a mortgage, they are using leverage. People seem to accept that and usually recommend that they make sure to have some bonds for a variety of reasons. However, when it is mentioned that money has been taken out of the house, it seems to get a different response all together. I am not sure why though.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by ivgrivchuck »

Ron Ronnerson wrote: Fri Jan 01, 2021 2:41 am Exactly, yet it’s been stated a lot in this thread. I’m trying to figure out the reason for the discrepancy. I am wondering if the advice would have been the same if the OP had not stated that they had $200k in cash due to taking it out of the house but had instead just said “I’ve got $200k laying around and am wondering what to do with it. By the way, I’ve got a mortgage at 2.25% and have a fair bit of equity in the house.” Based on past posts I’ve seen, I believe that many would say to invest but not likely at 100% equities.
- The most common advice in that hypothetical situation would be to use some of that cash against their mortgage and to invest the rest.
- Let's say that the result is that 50% gets put against the mortgage and 50% goes into 75/25 portfolio.
- So: 100k goes for paying back mortgage (good!). 75k goes into stock market (good!). 25k goes into bond market (slightly suboptimal, but it doesn't matter in the big picture, the loss is so small, and some extra liquidity might be beneficial)

While here OP has taken out 200k against their house and wants to invest it in 50/50 portfolio:
- 100k goes into stock market (good!)
- 100k goes into bond market (hugely suboptimal!)


Can't you see the difference?
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by 000 »

placeholder wrote: Fri Jan 01, 2021 2:29 am
000 wrote: Fri Jan 01, 2021 2:17 am
placeholder wrote: Fri Jan 01, 2021 2:12 am ^^^ I think that's poor advice and I rarely see it suggested in portfolio reviews.
You rarely see it because many posters don't seem to understand the difference between bond past returns and current yields.
Current yields are what they are and can change in the future it doesn't make much sense to fixate on that when you can use cheap leverage to improve your portfolio.
Only works in a declining rate scenario.

Just admit it, you're an interest rate speculator. :P
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Ron Ronnerson »

ivgrivchuck wrote: Fri Jan 01, 2021 3:50 am
Ron Ronnerson wrote: Fri Jan 01, 2021 2:41 am Exactly, yet it’s been stated a lot in this thread. I’m trying to figure out the reason for the discrepancy. I am wondering if the advice would have been the same if the OP had not stated that they had $200k in cash due to taking it out of the house but had instead just said “I’ve got $200k laying around and am wondering what to do with it. By the way, I’ve got a mortgage at 2.25% and have a fair bit of equity in the house.” Based on past posts I’ve seen, I believe that many would say to invest but not likely at 100% equities.
- The most common advice in that hypothetical situation would be to use some of that cash against their mortgage and to invest the rest.
- Let's say that the result is that 50% gets put against the mortgage and 50% goes into 75/25 portfolio.
- So: 100k goes for paying back mortgage (good!). 75k goes into stock market (good!). 25k goes into bond market (slightly suboptimal, but it doesn't matter in the big picture, the loss is so small, and some extra liquidity might be beneficial)

While here OP has taken out 200k against their house and wants to invest it in 50/50 portfolio:
- 100k goes into stock market (good!)
- 100k goes into bond market (hugely suboptimal!)


Can't you see the difference?
It hasn’t been my observation that this is the most common advice given, though. Perhaps I just haven’t been observant enough. Even then, why suggest doing anything that would be suboptimal? Why not specifically say not to buy bonds until the mortgage is fully paid off? Instead, I tend to see suggestions to invest money at one’s chosen asset allocation and stay the course through thick and thin. I haven’t noticed the caveat that this does not apply if one has a mortgage.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by sapphire96 »

mbasherp wrote: Tue Dec 29, 2020 9:58 pm In reading between the lines of the posts and responses here, I think this is something OP might perceive as an acceptable response:

Do whatever you want with it because historically, you are likely (not guaranteed) to outperform 2.25% annually with a portfolio over 15 years. But be aware that putting any of the money into bonds is most likely to be negative arbitrage in the current environment. You are unlikely to come out ahead borrowing X at 2.25% to earn less than that. This should be clear.

The people whose feedback you seem to be disliking are telling you to trust the bond market, which is both larger than the stock market and correct about the future more often. There’s no way to achieve higher returns with bonds (a mortgage) leveraged on other bonds of a similar risk level. Your plan hinges on taking more risk to get a better return. Although, you may very well succeed.

I would personally say that this is only worth doing if you’re comfortable going 100% equities with it and sure you can stay the course. I am basically 100% equities but I haven’t ever pulled cash out of my home.
+1
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by bling »

Ron Ronnerson wrote: Fri Jan 01, 2021 9:29 am
ivgrivchuck wrote: Fri Jan 01, 2021 3:50 am
Ron Ronnerson wrote: Fri Jan 01, 2021 2:41 am Exactly, yet it’s been stated a lot in this thread. I’m trying to figure out the reason for the discrepancy. I am wondering if the advice would have been the same if the OP had not stated that they had $200k in cash due to taking it out of the house but had instead just said “I’ve got $200k laying around and am wondering what to do with it. By the way, I’ve got a mortgage at 2.25% and have a fair bit of equity in the house.” Based on past posts I’ve seen, I believe that many would say to invest but not likely at 100% equities.
- The most common advice in that hypothetical situation would be to use some of that cash against their mortgage and to invest the rest.
- Let's say that the result is that 50% gets put against the mortgage and 50% goes into 75/25 portfolio.
- So: 100k goes for paying back mortgage (good!). 75k goes into stock market (good!). 25k goes into bond market (slightly suboptimal, but it doesn't matter in the big picture, the loss is so small, and some extra liquidity might be beneficial)

While here OP has taken out 200k against their house and wants to invest it in 50/50 portfolio:
- 100k goes into stock market (good!)
- 100k goes into bond market (hugely suboptimal!)


Can't you see the difference?
It hasn’t been my observation that this is the most common advice given, though. Perhaps I just haven’t been observant enough. Even then, why suggest doing anything that would be suboptimal? Why not specially say not to buy bonds until the mortgage is fully paid off? Instead, I tend to see suggestions to invest money at one’s chosen asset allocation and stay the course through thick and thin. I haven’t noticed the caveat that this does not apply if one has a mortgage.
investing in bonds while you have a mortgage at the current rates is "suboptimal" but i do believe there is value in bonds providing a ballast in your investments if that's what it takes for you the stay the course. liquidity is also important enough for some people that they may be willing to pay a small fee rather than having it locked up in home equity.

and while i myself do not treat a mortgage as a negative bond, i do find it fascinating that after 4 pages this hasn't come up yet. i suppose all the people suggesting to put all 200k back into the mortgage are closest to this viewpoint.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by ivgrivchuck »

Ron Ronnerson wrote: Fri Jan 01, 2021 9:29 am
ivgrivchuck wrote: Fri Jan 01, 2021 3:50 am
Ron Ronnerson wrote: Fri Jan 01, 2021 2:41 am Exactly, yet it’s been stated a lot in this thread. I’m trying to figure out the reason for the discrepancy. I am wondering if the advice would have been the same if the OP had not stated that they had $200k in cash due to taking it out of the house but had instead just said “I’ve got $200k laying around and am wondering what to do with it. By the way, I’ve got a mortgage at 2.25% and have a fair bit of equity in the house.” Based on past posts I’ve seen, I believe that many would say to invest but not likely at 100% equities.
- The most common advice in that hypothetical situation would be to use some of that cash against their mortgage and to invest the rest.
- Let's say that the result is that 50% gets put against the mortgage and 50% goes into 75/25 portfolio.
- So: 100k goes for paying back mortgage (good!). 75k goes into stock market (good!). 25k goes into bond market (slightly suboptimal, but it doesn't matter in the big picture, the loss is so small, and some extra liquidity might be beneficial)

While here OP has taken out 200k against their house and wants to invest it in 50/50 portfolio:
- 100k goes into stock market (good!)
- 100k goes into bond market (hugely suboptimal!)


Can't you see the difference?
It hasn’t been my observation that this is the most common advice given, though. Perhaps I just haven’t been observant enough. Even then, why suggest doing anything that would be suboptimal? Why not specifically say not to buy bonds until the mortgage is fully paid off? Instead, I tend to see suggestions to invest money at one’s chosen asset allocation and stay the course through thick and thin. I haven’t noticed the caveat that this does not apply if one has a mortgage.
It has mainly to do with investment psychology. People use different mental accounting for their investment portfolio vs house equity. If their investment portfolio is 100% in stocks and there is a big drop in the market, they may not be able to mentally handle it (even though they have a lot of house equity to compensate for the loss, but people don't feel that way).

That's why it's better to suggest a method that's slightly suboptimal but easier to handle mentally than a mathematically optimal method.

But if it gets too suboptimal: a person has a lot of bonds and a mortgage, then it's the time to propose that "hey, you would be better off by liquidating those bonds and paying off your mortgage".

The main goal is always to stay the course.
45% VTI | 35% VXUS | 10% I-bonds | 10% EE-bonds
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by TheDogFather »

I faced a similar situation due to an inheritance a handful of years ago. My allocation in equities was already leaning a little more aggressive than I wanted due to market returns and so I chose to pay off the mortgage, and used the cash flow to increase bond holding and then equities, doing what I could with the location of the stocks and bond funds in taxable and tax-advantaged.

Putting dollars from a refinance into equities would only make sense to me if my allocation was too conservative and I was comfortable with weathering a long time horizon if things took a significant turn for the worst.

How well could you cope with a scenario of significant long-term market downturn in equities, and possible job loss alongside the larger mortgage.
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alexL
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by alexL »

ivgrivchuck wrote: Fri Jan 01, 2021 12:22 pm
Ron Ronnerson wrote: Fri Jan 01, 2021 9:29 am
ivgrivchuck wrote: Fri Jan 01, 2021 3:50 am
Ron Ronnerson wrote: Fri Jan 01, 2021 2:41 am Exactly, yet it’s been stated a lot in this thread. I’m trying to figure out the reason for the discrepancy. I am wondering if the advice would have been the same if the OP had not stated that they had $200k in cash due to taking it out of the house but had instead just said “I’ve got $200k laying around and am wondering what to do with it. By the way, I’ve got a mortgage at 2.25% and have a fair bit of equity in the house.” Based on past posts I’ve seen, I believe that many would say to invest but not likely at 100% equities.
- The most common advice in that hypothetical situation would be to use some of that cash against their mortgage and to invest the rest.
- Let's say that the result is that 50% gets put against the mortgage and 50% goes into 75/25 portfolio.
- So: 100k goes for paying back mortgage (good!). 75k goes into stock market (good!). 25k goes into bond market (slightly suboptimal, but it doesn't matter in the big picture, the loss is so small, and some extra liquidity might be beneficial)

While here OP has taken out 200k against their house and wants to invest it in 50/50 portfolio:
- 100k goes into stock market (good!)
- 100k goes into bond market (hugely suboptimal!)


Can't you see the difference?
It hasn’t been my observation that this is the most common advice given, though. Perhaps I just haven’t been observant enough. Even then, why suggest doing anything that would be suboptimal? Why not specifically say not to buy bonds until the mortgage is fully paid off? Instead, I tend to see suggestions to invest money at one’s chosen asset allocation and stay the course through thick and thin. I haven’t noticed the caveat that this does not apply if one has a mortgage.
It has mainly to do with investment psychology. People use different mental accounting for their investment portfolio vs house equity. If their investment portfolio is 100% in stocks and there is a big drop in the market, they may not be able to mentally handle it (even though they have a lot of house equity to compensate for the loss, but people don't feel that way).

That's why it's better to suggest a method that's slightly suboptimal but easier to handle mentally than a mathematically optimal method.

But if it gets too suboptimal: a person has a lot of bonds and a mortgage, then it's the time to propose that "hey, you would be better off by liquidating those bonds and paying off your mortgage".

The main goal is always to stay the course.
I don't know how house equity can compensate for the stock market loss and in what way. House prices often crash when stock market crashes. Can you elaborate the details? Thanks.
Topic Author
alexL
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by alexL »

White Coat Investor wrote: Thu Dec 31, 2020 8:44 pm
vineviz wrote: Tue Dec 29, 2020 7:24 pm
alexL wrote: Tue Dec 29, 2020 6:43 pm The interests are so ridiculously low so I decided to take a portion of my equity out while doing refinancing.

I am getting a 2.25% 15-year loan. $200K of the loan is cash out.

I already max out my 401k and IRA for many years. I also have some taxable accounts with half stock index and half bond index.

What would be your suggestions for investing the 200k?
Pay off the mortgage:)

Why are you paying 2.25% on the mortgage while earning roughly 1% on your bond index fund?
My thoughts exactly. If I had $200K I wasn't sure what to do with and a $200K mortgage, I'd pay off the mortgage and earn a guaranteed 2.25% on that money. Way better than the yield on any other safe investment right now.
Basically you are asking people carrying any mortgage to avoid any other investment contributions with any risks. Just pay every cent into the mortgage to have a guaranteed 2.25% return. Do you do that yourself?
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by vineviz »

alexL wrote: Fri Jan 01, 2021 2:02 pm I don't know how house equity can compensate for the stock market loss and in what way. House prices often crash when stock market crashes. Can you elaborate the details? Thanks.
Because the mortgage loan and the house are two different things. If you want less exposure to the real estate market, you achieve that by purchasing a cheaper house not by taking out a bigger mortgage.

If the price of your house "crashes when the stock market crashes", you still owe the bank for the mortgage loan. Unless you're prepared to file for bankruptcy, in which case you'll lose the stocks and bonds in your taxable account anyway.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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vineviz
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by vineviz »

alexL wrote: Fri Jan 01, 2021 2:09 pm
White Coat Investor wrote: Thu Dec 31, 2020 8:44 pm
vineviz wrote: Tue Dec 29, 2020 7:24 pm
alexL wrote: Tue Dec 29, 2020 6:43 pm The interests are so ridiculously low so I decided to take a portion of my equity out while doing refinancing.

I am getting a 2.25% 15-year loan. $200K of the loan is cash out.

I already max out my 401k and IRA for many years. I also have some taxable accounts with half stock index and half bond index.

What would be your suggestions for investing the 200k?
Pay off the mortgage:)

Why are you paying 2.25% on the mortgage while earning roughly 1% on your bond index fund?
My thoughts exactly. If I had $200K I wasn't sure what to do with and a $200K mortgage, I'd pay off the mortgage and earn a guaranteed 2.25% on that money. Way better than the yield on any other safe investment right now.
Basically you are asking people carrying any mortgage to avoid any other investment contributions with any risks. Just pay every cent into the mortgage to have a guaranteed 2.25% return. Do you do that yourself?
Not so. The idea is not that people with a mortgage should "avoid any other investment contributions with any risks". The idea is that people with a mortgage should avoid investment contributions to assets having the same risk and lower returns than the mortgage. They should - usually - avoid owning bonds, for instance, if the yield on bonds is less than the interest rate on the mortgage.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by deltaneutral83 »

Being agnostic on the big bad Mortgage/Invest debate I don't really care either way but if you are going to take out home equity to invest for periods of 15+ years (which seems to be the best way to smooth the risk/return?) it seems as though you'd only put up the minimum home equity, and invest the rest, and then take out a good chunk (30% of your taxable account) on margin with Interactive brokers and throw that in equities as well? I think when you go somewhere in between you're going to have about a thousand different opinions in the first hour, whereas if you hold tight to a belief (no debt and then invest in taxable vs. leverage to the hilt with anything under 3% and keep home equity at the lender minimum maybe even I/O(?)) and full steam ahead either way.

I'm in between so I wouldn't bash anyone who also is "in between" which is probably nearly everyone else. Personally, I like to split the difference in these situations (as long as I have 15+ years left of accumulating), so maybe get to a 50 LTV on the home and invest the rest in equities and get rid of the bonds possibly. All of this changes if time horizon/AA is going to change soon (fewer than 15 years). Anything can happen in 15 years with regard to "which asset class will outperform."
Last edited by deltaneutral83 on Fri Jan 01, 2021 2:44 pm, edited 1 time in total.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by ivgrivchuck »

alexL wrote: Fri Jan 01, 2021 2:02 pm I don't know how house equity can compensate for the stock market loss and in what way. House prices often crash when stock market crashes. Can you elaborate the details? Thanks.
Regardless whether your money is in bonds or in house equity, your loss is the same. You own the same amount of stocks (which crash) and you have a house which value plummets. Whether you have bonds or your mortgage is smaller, it doesn't change the loss of your net worth a single cent.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by NabSh »

I think the goal is based on personal risk tolerance, current income, ability to have new savings.

If you have good savings and could muster market peeks and lows ( years, not weeks or months). Then you can use the house as ATM to draw money and invest in stock. Most people who did this 2005 - 2007 got burned. Depending how you count, it took years to just even out (Nasdaq took 10 years to reach 2007 levels)
Valueinvestor2 wrote: Thu Dec 31, 2020 10:55 pm
hightower wrote: Thu Dec 31, 2020 10:54 am
Valueinvestor2 wrote: Tue Dec 29, 2020 7:59 pm
alexL wrote: Tue Dec 29, 2020 6:43 pm The interests are so ridiculously low so I decided to take a portion of my equity out while doing refinancing.

I am getting a 2.25% 15-year loan. $200K of the loan is cash out.

I already max out my 401k and IRA for many years. I also have some taxable accounts with half stock index and half bond index.

What would be your suggestions for investing the 200k?
I don’t disagree with this approach. Seems a little ridiculous that you are being criticized. Math is math. A dummy can make 7% annualized in index funds over the long haul and you are paying 2.25%. It’s math.

Obviously some things to consider are income security and how long you plan to stay in the house.

Personally I am not doing this now bc I buy individual companies and right now I don’t see any great opportunities. If the market dips it’s a no brainer IMO. Again, math is math.
Yeah and a lot of those "dummies" tried to make 7% returns with index funds in 2007 and did exactly as the OP described. Then the housing market and stocks did a nose dive and they were suddenly underwater on the mortgage and out of work...foreclosures through the roof. Not a guarantee you'll make anything in the stock market, so borrowing that much money to try and invest it is foolish in my book.
Well if those “dummies” stuck to their plan how would they be doing as of December 31, 2020?

Answer: pretty damn good.

It’s math. Very simple math. Again, any bogleheads want to debate math?
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White Coat Investor
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by White Coat Investor »

alexL wrote: Fri Jan 01, 2021 2:09 pm
White Coat Investor wrote: Thu Dec 31, 2020 8:44 pm
vineviz wrote: Tue Dec 29, 2020 7:24 pm
alexL wrote: Tue Dec 29, 2020 6:43 pm The interests are so ridiculously low so I decided to take a portion of my equity out while doing refinancing.

I am getting a 2.25% 15-year loan. $200K of the loan is cash out.

I already max out my 401k and IRA for many years. I also have some taxable accounts with half stock index and half bond index.

What would be your suggestions for investing the 200k?
Pay off the mortgage:)

Why are you paying 2.25% on the mortgage while earning roughly 1% on your bond index fund?
My thoughts exactly. If I had $200K I wasn't sure what to do with and a $200K mortgage, I'd pay off the mortgage and earn a guaranteed 2.25% on that money. Way better than the yield on any other safe investment right now.
Basically you are asking people carrying any mortgage to avoid any other investment contributions with any risks. Just pay every cent into the mortgage to have a guaranteed 2.25% return. Do you do that yourself?
Are you asking if I have a mortgage? The answer is no. Are you asking if I would take out a HELOC to invest? The answer is no. Are you asking if I ever invested while I still had debt? The answer is yes, but it made almost zero difference in my net worth. Hope that clarifies what I do and have done.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Firemenot »

Haven’t read the four pages of posts so maybe this point has already been made. Unless I’m missing something, what OP is doing is no different than a person sitting on 200K in cash and deciding whether to apply the 200K against mortgage balance or invest.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by LongRoad »

Firemenot wrote: Fri Jan 01, 2021 4:37 pm Haven’t read the four pages of posts so maybe this point has already been made. Unless I’m missing something, what OP is doing is no different than a person sitting on 200K in cash and deciding whether to apply the 200K against mortgage balance or invest.
Perhaps. But I also wouldn't suggest investing one dime of the $200K in taxable bonds yielding ~1% while holding a (likely) non-deductible mortgage and paying 30%+ marginal tax rates, in preference to paying down the mortgage.

Though obviously others disagree.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Firemenot »

LongRoad wrote: Fri Jan 01, 2021 4:57 pm
Firemenot wrote: Fri Jan 01, 2021 4:37 pm Haven’t read the four pages of posts so maybe this point has already been made. Unless I’m missing something, what OP is doing is no different than a person sitting on 200K in cash and deciding whether to apply the 200K against mortgage balance or invest.
Perhaps. But I also wouldn't suggest investing one dime of the $200K in taxable bonds yielding ~1% while holding a (likely) non-deductible mortgage and paying 30%+ marginal tax rates, in preference to paying down the mortgage.

Though obviously others disagree.
I wouldn’t invest in bonds either. If he’s going to be bold, throw it all in a stock index fund and let her ride. With a 10-year time horizon it almost assuredly would work out OK. And California is a non-recourse state anyhow if there’s some unforeseen foreclosure risk.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by ensign »

Valueinvestor2 wrote: Tue Dec 29, 2020 7:59 pm
alexL wrote: Tue Dec 29, 2020 6:43 pm
I don’t disagree with this approach. Seems a little ridiculous that you are being criticized. Math is math. A dummy can make 7% annualized in index funds over the long haul and you are paying 2.25%. It’s math.
Another sign of a market top?
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Firemenot »

ensign wrote: Fri Jan 01, 2021 5:38 pm
Valueinvestor2 wrote: Tue Dec 29, 2020 7:59 pm
alexL wrote: Tue Dec 29, 2020 6:43 pm
I don’t disagree with this approach. Seems a little ridiculous that you are being criticized. Math is math. A dummy can make 7% annualized in index funds over the long haul and you are paying 2.25%. It’s math.
Another sign of a market top?
Counterpoint — all this talk of market top signals could just mean there’s more left on the wall of worry to climb
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Big Dog »

Horton wrote: Thu Dec 31, 2020 8:53 pm Why not just go from 70/30 to 90/10 (or 100% equities) rather than take out a loan?
actually, the OP is currently at 40:60 (when all accounts are totaled)
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Big Dog »

ivgrivchuck wrote: Fri Jan 01, 2021 12:22 pm
Ron Ronnerson wrote: Fri Jan 01, 2021 9:29 am
ivgrivchuck wrote: Fri Jan 01, 2021 3:50 am
Ron Ronnerson wrote: Fri Jan 01, 2021 2:41 am Exactly, yet it’s been stated a lot in this thread. I’m trying to figure out the reason for the discrepancy. I am wondering if the advice would have been the same if the OP had not stated that they had $200k in cash due to taking it out of the house but had instead just said “I’ve got $200k laying around and am wondering what to do with it. By the way, I’ve got a mortgage at 2.25% and have a fair bit of equity in the house.” Based on past posts I’ve seen, I believe that many would say to invest but not likely at 100% equities.
- The most common advice in that hypothetical situation would be to use some of that cash against their mortgage and to invest the rest.
- Let's say that the result is that 50% gets put against the mortgage and 50% goes into 75/25 portfolio.
- So: 100k goes for paying back mortgage (good!). 75k goes into stock market (good!). 25k goes into bond market (slightly suboptimal, but it doesn't matter in the big picture, the loss is so small, and some extra liquidity might be beneficial)

While here OP has taken out 200k against their house and wants to invest it in 50/50 portfolio:
- 100k goes into stock market (good!)
- 100k goes into bond market (hugely suboptimal!)


Can't you see the difference?
It hasn’t been my observation that this is the most common advice given, though. Perhaps I just haven’t been observant enough. Even then, why suggest doing anything that would be suboptimal? Why not specifically say not to buy bonds until the mortgage is fully paid off? Instead, I tend to see suggestions to invest money at one’s chosen asset allocation and stay the course through thick and thin. I haven’t noticed the caveat that this does not apply if one has a mortgage.
It has mainly to do with investment psychology. People use different mental accounting for their investment portfolio vs house equity. If their investment portfolio is 100% in stocks and there is a big drop in the market, they may not be able to mentally handle it (even though they have a lot of house equity to compensate for the loss, but people don't feel that way).

That's why it's better to suggest a method that's slightly suboptimal but easier to handle mentally than a mathematically optimal method.

But if it gets too suboptimal: a person has a lot of bonds and a mortgage, then it's the time to propose that "hey, you would be better off by liquidating those bonds and paying off your mortgage".

The main goal is always to stay the course.

I had/(still have) a mortgage and was 100% equities until early 60's, at which time I started to buy bonds, to reduce exposure to a market crash right when I was about to retire. Now that I've been retired for a couple of years and closer to SS max at 70n -- still have the mortgage, but paying it down quickly -- I've started reducing bond allocation.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by aristotelian »

Ron Ronnerson wrote: Fri Jan 01, 2021 2:41 am
placeholder wrote: Fri Jan 01, 2021 2:12 am ^^^ I think that's poor advice and I rarely see it suggested in portfolio reviews.
Exactly, yet it’s been stated a lot in this thread. I’m trying to figure out the reason for the discrepancy. I am wondering if the advice would have been the same if the OP had not stated that they had $200k in cash due to taking it out of the house but had instead just said “I’ve got $200k laying around and am wondering what to do with it. By the way, I’ve got a mortgage at 2.25% and have a fair bit of equity in the house.” Based on past posts I’ve seen, I believe that many would say to invest but not likely at 100% equities.

Whenever someone is investing while having a mortgage, they are using leverage. People seem to accept that and usually recommend that they make sure to have some bonds for a variety of reasons. However, when it is mentioned that money has been taken out of the house, it seems to get a different response all together. I am not sure why though.
Investing while carrying a mortgage (even with some amount of bonds!) makes sense for a young investor without a lot of liquidity. There is no other option for them to get more money in the market. For someone who already has a paid off house and a significant bond allocation, it makes less sense because they can just as easily reduce their bond allocation. They are different situations.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Horton »

Big Dog wrote: Fri Jan 01, 2021 6:09 pm
Horton wrote: Thu Dec 31, 2020 8:53 pm Why not just go from 70/30 to 90/10 (or 100% equities) rather than take out a loan?
actually, the OP is currently at 40:60 (when all accounts are totaled)
How do you figure? Looks to me like $1.2m with $400k in bonds.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by ivgrivchuck »

Big Dog wrote: Fri Jan 01, 2021 6:15 pm
I had/(still have) a mortgage and was 100% equities until early 60's, at which time I started to buy bonds, to reduce exposure to a market crash right when I was about to retire. Now that I've been retired for a couple of years and closer to SS max at 70n -- still have the mortgage, but paying it down quickly -- I've started reducing bond allocation.
Absolutely. I assume that the bonds provided the necessary liquidity in your portfolio through the early retirement years. And this is exactly how the bonds should be used when having a mortgage. After SS kicks in, you don't need that much liquidity any more, and you can cash out some of the bonds to pay back the mortgage.

Makes perfect sense.
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GreenGreenWater
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by GreenGreenWater »

Not read all of these replies yet but in simple terms
1. Op has 200K which cost 2.25% no matter what (cost of fund)
2. want to invest it so that he can earn more than 2.25% after tax

Based on other assets and income channels, can he ride any short/middle term downturn?
If so he can invest it on stock/bond portfolio to get return higher than 2.25% after tax, short/middle term.

And one thing, he can pay back mortgage 200K anytime he wants to get 2.25% return on his mortgage.

my two cents
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