Taking an unnecessary mortgage in order to invest
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Taking an unnecessary mortgage in order to invest
My in-laws wanted me to post this here - they are 64 and 62, selling their house (my wife's childhood home) for $730k (they have no mortgage). They are buying a 55+ townhouse nearby and could have paid for the entire townhouse in cash (the townhouse will be closer to $900k) but my father-in-law decided he wanted to play with $200k instead of "tying it up in the house" and wants to take out a 15-year $200k mortgage (2.25% interest). His rationale is that he believes the market will return more than that over the next 15 years.
For a little more info - he is still working (~200-275k salary depending on the year - he is a business owner) -- they are worth around $4 million if you include the townhouse as an asset, so this dollar amount is not exactly a huge portion of their net worth or their monthly income.
What are your thoughts on this? I don't love the idea of taking out a loan to gamble with returns, but at the same time the risk seems to be relatively low considering their solid financial status?
For a little more info - he is still working (~200-275k salary depending on the year - he is a business owner) -- they are worth around $4 million if you include the townhouse as an asset, so this dollar amount is not exactly a huge portion of their net worth or their monthly income.
What are your thoughts on this? I don't love the idea of taking out a loan to gamble with returns, but at the same time the risk seems to be relatively low considering their solid financial status?
Re: Taking an unnecessary mortgage in order to invest
I wouldn't do it, but as you say he is not placing himself in real danger. Ask him what he plans to do with the money if he turns a profit? He will be 79 when the mortgage is paid off! Still able to enjoy the money?
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Re: Taking an unnecessary mortgage in order to invest
As a business owner, wouldn’t it make more sense to simply draw less income? Otherwise he is paying tax on what appears to be uneeded income in order to pay interest on a mortgage which would then be invested into the market and, assuming he has gains, pay taxes on those gains.
Re: Taking an unnecessary mortgage in order to invest
Anyone that has non-retirement liquid investments and a mortgage is doing exactly this, they just aren't being up front about it like your FIL. It's obviously very common here, but for some reason being upfront makes it "seem" different and therefore is frowned upon.defscott627 wrote: ↑Fri Aug 20, 2021 8:09 am My in-laws wanted me to post this here - they are 64 and 62, selling their house (my wife's childhood home) for $730k (they have no mortgage). They are buying a 55+ townhouse nearby and could have paid for the entire townhouse in cash (the townhouse will be closer to $900k) but my father-in-law decided he wanted to play with $200k instead of "tying it up in the house" and wants to take out a 15-year $200k mortgage (2.25% interest). His rationale is that he believes the market will return more than that over the next 15 years.
For a little more info - he is still working (~200-275k salary depending on the year - he is a business owner) -- they are worth around $4 million if you include the townhouse as an asset, so this dollar amount is not exactly a huge portion of their net worth or their monthly income.
What are your thoughts on this? I don't love the idea of taking out a loan to gamble with returns, but at the same time the risk seems to be relatively low considering their solid financial status?
Last edited by pizzy on Fri Aug 20, 2021 11:22 am, edited 1 time in total.
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Re: Taking an unnecessary mortgage in order to invest
I don't think that this is a good idea, but I also don't think that this is going to make much of a difference to your father-in-law's net worth in the long run. If he wants to play a stock guru with a little bit of borrowed money, I say let him.
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Re: Taking an unnecessary mortgage in order to invest
If sounds like he is willing and able to take the risk and is not all that debt averse. Maybe he still remembers the 80s and realizes just how high mortgage rates can get and figures inflation is reasonably likely to be either at or above the mortgage rate. He will likely make some money doing this but if it doesn’t turn out well, it wouldn’t really affect things too badly. I wouldn’t say much as it seems like he knows what he is signing up for.
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Re: Taking an unnecessary mortgage in order to invest
Indeed!pizzy wrote: ↑Fri Aug 20, 2021 8:24 am Anyone that has non-retirement liquid assets and a mortgage is doing exactly this, they just aren't being up front about it like your FIL. It's obviously very common here, but for some reason being upfront makes it "seem" different and therefore is frowned upon.
I think it's a fine decision. I'd tell them to get a 30 year mortgage
Re: Taking an unnecessary mortgage in order to invest
It would be good to encourage them to post here themself and get you out of the loop so you will not be seen as being the bad guy.
The way that is phrased is concerning. Buying some index funds would be one thing but if he is talking about doing something like day trading that is little more than gambling with the $200K.defscott627 wrote: ↑Fri Aug 20, 2021 8:09 am ....my father-in-law decided he wanted to play with $200k
I would not recommend it but if he wants to do that there is no reason to take out a mortgage to do that. He could just move $200K in his other funds into his play account.
At their age they likely have something like a 50/50 stock asset allocation which would mean they have around $2 million in bonds that are earning around 1% after taxes. Taking out a $200K loan at 2.25% makes little sense when they have that much in bonds that is earning a lower interest rate.
With the play account he might even hit a trifecta of taxes and in addition to normal capital gains taxes his investments might also generate lots of other taxes so he should know the tax impact ahead of time. For example it could trigger;
1) IRMAA taxes
2) NIIT taxes
3) Cause more of their social security to be taxed.
One of the huge advantages of having a paid off house is that you do not need to pay taxes on the income needed for the imputed rent. My situation is much different but having a paid off house allows me to stay in a low tax bracket.
If he does this I would highly suggest that he open a seperate account for that $200K and then make the mortgage payment, and pay any related taxes, out of that account. This will make it very easy to see if his account balance is higher than the mortgage balance.defscott627 wrote: ↑Fri Aug 20, 2021 8:09 am His rationale is that he believes the market will return more than that over the next 15 years.
Investing the money and getting a higher investment return is harder than it sounds because you have a sequence of returns risk. Here is a simplistic example of that which I have posted before.
Something to keep in mind is that making bad financial choices can be a sign of early dementia and that can hit in your 60s or even younger. If this is out of character for him it might be good for him to talk to his doctor about it. It would also be good for your mother in law to keep on top of all the trades that he is making and all of their finances. That way she can intervene if there is a problem. There have been posts by people who were in trouble since someone had been making a lot of reckless financial moves without anyone else in the family knowing.If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;
a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.
In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)
https://investor.vanguard.com/investing ... allocation
The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.
Last edited by Watty on Fri Aug 20, 2021 10:26 am, edited 1 time in total.
Re: Taking an unnecessary mortgage in order to invest
The only potential issue is when he plans to retire and what their income will look like then relative to their expenses. Presumably he’ll retire before the mortgage is paid off.
If they have roughly $3 million in liquid assets, then they can withdraw about $120K/year (inflation adjusted) from their portfolio. Will that amount plus any Social Security (or other income) be sufficient to cover the mortgage and all other expenses?
If so, then there is minimal risk in taking the mortgage.
But if there will be a problem with their retirement income covering all their expenses, then the mortgage isn’t a good idea.
As always in retirement, the bottom line is that your income needs to greater than your expenses. The absolute levels don’t matter.
If they have roughly $3 million in liquid assets, then they can withdraw about $120K/year (inflation adjusted) from their portfolio. Will that amount plus any Social Security (or other income) be sufficient to cover the mortgage and all other expenses?
If so, then there is minimal risk in taking the mortgage.
But if there will be a problem with their retirement income covering all their expenses, then the mortgage isn’t a good idea.
As always in retirement, the bottom line is that your income needs to greater than your expenses. The absolute levels don’t matter.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Re: Taking an unnecessary mortgage in order to invest
Every non-retirement account dollar you keep invested or continue to add to the investment while holding a residential mortgage is making a conscious decision to leverage your investments.
You could de-leverage by using those funds to pay down/off your mortgage.
50,000 in brokerage + $150,000 mortgage could easily have been $0 in brokerage + $100,000 mortgage.
What's the difference if you do it upfront or during?
For the record, with mortgage rates ~<3% I would 100% prefer "50,000 in brokerage + $150,000 mortgage" than "$0 in brokerage + $100,000 mortgage"
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Re: Taking an unnecessary mortgage in order to invest
I think many people would consider that a shrewd financial move. A business owner, accustomed to leverage and risk, may feel it is a particularly attractive move, given current interest rates. Seems perfectly OK to me, though I personally value a paid-off home.
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Re: Taking an unnecessary mortgage in order to invest
Unpopular opinion here - but I think it's a great idea. Assuming you have some emergency fund and no other high interest debt.
Maybe not at 64 though.
Maybe not at 64 though.
Re: Taking an unnecessary mortgage in order to invest
We just did a mild version of this. We could pay off our mortgage, but decided to refi this month from 9 years left to 15. Last year we had 7.5 years left and refi'ed to 10. Rates on our mortgage dropped from 3 to 2.5 last year and to 1.875 just now. Our mortgage payment is lower by a lot. We don't need the added cashflow, but it's nice to have, and the difference is being invested at what I hope over 15 years will easily beat 1.875%. We don't deduct interest so there is not advantage from that end either.
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Re: Taking an unnecessary mortgage in order to invest
defscott627 wrote: ↑Fri Aug 20, 2021 8:09 am My in-laws wanted me to post this here - they are 64 and 62, selling their house (my wife's childhood home) for $730k (they have no mortgage). They are buying a 55+ townhouse nearby and could have paid for the entire townhouse in cash (the townhouse will be closer to $900k) but my father-in-law decided he wanted to play with $200k instead of "tying it up in the house" and wants to take out a 15-year $200k mortgage (2.25% interest). His rationale is that he believes the market will return more than that over the next 15 years.
For a little more info - he is still working (~200-275k salary depending on the year - he is a business owner) -- they are worth around $4 million if you include the townhouse as an asset, so this dollar amount is not exactly a huge portion of their net worth or their monthly income.
What are your thoughts on this? I don't love the idea of taking out a loan to gamble with returns, but at the same time the risk seems to be relatively low considering their solid financial status?
if we can't get 2.25% in the market over 15 years ... what are we doing?
From the more typical dollar cost averaging of *payroll* stock purchases,
its would be pretty tough to find a 15 year period where the series of
regular investments did NOT beat the mortgage.
But his is a cash dump(s), so the timing of initial purchase is a bit more critcal
my *bet* is he will be more than fine...
Re: Taking an unnecessary mortgage in order to invest
This is actually a lower risk move than the usual use of a mortgage, which is buying a house when younger. There, you are depending on future income to be able to make the payments, so there is substantial risk in that many things could interrupt that future income. Leveraging with investments, there is a risk with those investments too, but with a $200k loan, $200k+/year salary, and a $4M net worth, the risk seems very low.
He may or may not beat the 2.25% interest rate, but I think the risk of catastrophe is very low, provided the investing plan is reasonable (eg. passive stock funds).
He may or may not beat the 2.25% interest rate, but I think the risk of catastrophe is very low, provided the investing plan is reasonable (eg. passive stock funds).
Re: Taking an unnecessary mortgage in order to invest
What is the overall asset allocation of the $3 million?
Assume I had $2 million in equities and $1 million in fixed income. I would not be asking if an extra $200k in stocks would beat the mortgage. I would be asking if an extra $200k in fixed income would be the mortgage. The comparison of stocks to mortgage is completely different risk. You could just not take out a mortgage and increase your asset allocation towards equities if you want more risk.
Taxes need to be considered as well. Both what taxes may occur by not taking out the mortgage and by taking out the mortgage.
Assume I had $2 million in equities and $1 million in fixed income. I would not be asking if an extra $200k in stocks would beat the mortgage. I would be asking if an extra $200k in fixed income would be the mortgage. The comparison of stocks to mortgage is completely different risk. You could just not take out a mortgage and increase your asset allocation towards equities if you want more risk.
Taxes need to be considered as well. Both what taxes may occur by not taking out the mortgage and by taking out the mortgage.
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Re: Taking an unnecessary mortgage in order to invest
I wouldn’t. Wouldn’t it be easier to just put money from payroll into the market as he receives it? I see the mortgage as pointless risk. Couldn’t he also leverage his current stocks if he feels that confident?
Re: Taking an unnecessary mortgage in order to invest
Triple taxation...well I suppose someone has to pay for all those government programs.hoofaman wrote: ↑Fri Aug 20, 2021 8:21 am As a business owner, wouldn’t it make more sense to simply draw less income? Otherwise he is paying tax on what appears to be uneeded income in order to pay interest on a mortgage which would then be invested into the market and, assuming he has gains, pay taxes on those gains.
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Re: Taking an unnecessary mortgage in order to invest
Keep in mind that while it's easy to think about it in terms of the market earning more than the mortgage interest rate, that's also ignoring the need to make payments, so it's not the only variable in play. It would be great if everybody could do this whenever they felt like it, but if they can't make the payments next month, it doesn't matter how much the market returns over the next 15 years.
Except in limited circumstances, it really only makes sense to do this with close to 100% stocks. The reason is that mortgage is somewhat like a negative bond, and holding both bonds and mortgage debt is kind of like paying extra fees to be both short and long fixed income. This is admittedly somewhat of an oversimplification, as houses are not just an investment, so there are legitimate lifestyle reasons for buying a home while maintaining liquidity in bonds for the safety of being able to sustain monthly payments in the event of a job loss or something like that. Still, in general, you don't want to be something like 50% bonds with a large retirement portfolio when you could just pay off the house for a guaranteed greater return and own the place outright.
If your father in law really wants to make the conscious effort to juice his returns, his investments should be at or around 100% stocks. The whole point is to be able to invest the money for longer. There's no point in paying extra fees and taxes to have a $200k mortgage but then let $200k sit in lower yielding bonds. At that point, he's actually losing money, not making it, with the only benefit being more short-term liquidity, something which he really doesn't need at $4 million in net worth. The portfolio is his emergency fund, he doesn't need a pile of bonds to put food on the table next week. His income should pay the mortgage payments, not the portfolio, otherwise the mortgage is eating up the very thing he's trying to grow.
Personally, at that age, I wouldn't bother with having a mortgage. Not only is the peace of mind priceless, but most people are looking to reduce their risk, particularly that of sequence of returns, by having bonds at that age. If he really doesn't want any bonds, more power to him, but don't bother taking a mortgage just to be able to hold more bonds. Remember, many people face new and difficult challenges in old age. Having a mortgage is yet another thing to be fearful of should somebody in the home eventually suffer from dementia or perhaps an expensive injury. I'm not sure if they've thought about this, but in 15 years, they'll be 79 and 77. Do they really care if they'll have $5m or $6m (just throwing out random numbers, I have no clue what their projections would be) at that age? Do they still want to be 100% stocks at that age? It's one thing to make big plans for the future when we're young, but at their age and with the net worth they have, it's probably time to start thinking about how to enjoy some of that money before life passes them by. Instead of worrying about how a 100% stock portfolio with leverage will do over the next 15 years, they should be learning how to get the best deals on flights, restaurants, home renovations, etc.
That's assuming they're saving for themselves. If they're saving for charity or to leave an inheritance, that's a totally different ball game, but the thing about 100% stocks still applies.
Except in limited circumstances, it really only makes sense to do this with close to 100% stocks. The reason is that mortgage is somewhat like a negative bond, and holding both bonds and mortgage debt is kind of like paying extra fees to be both short and long fixed income. This is admittedly somewhat of an oversimplification, as houses are not just an investment, so there are legitimate lifestyle reasons for buying a home while maintaining liquidity in bonds for the safety of being able to sustain monthly payments in the event of a job loss or something like that. Still, in general, you don't want to be something like 50% bonds with a large retirement portfolio when you could just pay off the house for a guaranteed greater return and own the place outright.
If your father in law really wants to make the conscious effort to juice his returns, his investments should be at or around 100% stocks. The whole point is to be able to invest the money for longer. There's no point in paying extra fees and taxes to have a $200k mortgage but then let $200k sit in lower yielding bonds. At that point, he's actually losing money, not making it, with the only benefit being more short-term liquidity, something which he really doesn't need at $4 million in net worth. The portfolio is his emergency fund, he doesn't need a pile of bonds to put food on the table next week. His income should pay the mortgage payments, not the portfolio, otherwise the mortgage is eating up the very thing he's trying to grow.
Personally, at that age, I wouldn't bother with having a mortgage. Not only is the peace of mind priceless, but most people are looking to reduce their risk, particularly that of sequence of returns, by having bonds at that age. If he really doesn't want any bonds, more power to him, but don't bother taking a mortgage just to be able to hold more bonds. Remember, many people face new and difficult challenges in old age. Having a mortgage is yet another thing to be fearful of should somebody in the home eventually suffer from dementia or perhaps an expensive injury. I'm not sure if they've thought about this, but in 15 years, they'll be 79 and 77. Do they really care if they'll have $5m or $6m (just throwing out random numbers, I have no clue what their projections would be) at that age? Do they still want to be 100% stocks at that age? It's one thing to make big plans for the future when we're young, but at their age and with the net worth they have, it's probably time to start thinking about how to enjoy some of that money before life passes them by. Instead of worrying about how a 100% stock portfolio with leverage will do over the next 15 years, they should be learning how to get the best deals on flights, restaurants, home renovations, etc.
That's assuming they're saving for themselves. If they're saving for charity or to leave an inheritance, that's a totally different ball game, but the thing about 100% stocks still applies.
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Re: Taking an unnecessary mortgage in order to invest
I don't think it is a great idea. The main issue is if they do this and the stock market drops 50% in [fill in year in next 5 years] will they keep it totally invested? A secondary issue that is of lesser concern to me is that by many metrics the stock market is highly valued currently. However, do I think stocks will return more than 2.25% annualized over the next 15 years? Yes.
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Re: Taking an unnecessary mortgage in order to invest
I like it. I'd be absolutely floored if the market returns less than 2.25% annually across the next 15 years, so it's basically free money -- ASSUMING -- your FIL sticks to the exact plan laid out, which I trust he'll be able to do given the overall financial situation you've laid out.
Re: Taking an unnecessary mortgage in order to invest
What’s their AA? Assuming that expected return is greater than 2.25 after tax, seems fine.
Re: Taking an unnecessary mortgage in order to invest
Not my cup of tea but it seems ok. Although I’m wondering if they could just increase their equity allocation and skip incurring debt.
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Re: Taking an unnecessary mortgage in order to invest
For heaven's sake. Even the darned HFC jingle used to say never borrow money needlessly.
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Re: Taking an unnecessary mortgage in order to invest
How much money is 'enough' for them to retire comfortably and not have to worry about money? Do they need to take on the additional risk? If the market goes up 6% CAGR will the extra money make any difference in their long term plans?
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Re: Taking an unnecessary mortgage in order to invest
I was curious where the $200k came from. Why $200k and not, well, any other number? If he thinks the market will do better than 2.25%, why not a bigger amount? It's still small relative to his overall net worth.
His current house is apparently worth $730k. The new place will be almost $900k. Subtract realtor fees and transaction costs from $730k and you're under $700k...and that difference between proceeds from sale and what he would pay for the new place appears to be approximately $200k.
It sounds like he may just want to move into a new house without pulling any additional money from investments--he just wants to roll over his existing home equity and take a mortgage for the rest. If so, the rest of the rationale is just justification.
But, yes, anyone who has a taxable investment account at the same time as a mortgage has decided to have an unnecessary mortgage in order to invest. He will likely be better off taking the mortgage than with not investing the $200k, but it isn't guaranteed. Given his net worth and nice income, it likely doesn't matter a bit which way he goes. Since he seems to have some preference for not putting a large additional amount into his house, then "let" him take out the $200k mortgage with your blessing. In 15 years the difference between what was (in retrospect) the better choice is very unlikely to be even as much as 2% of his portfolio (say, $100k out of $5MM), which isn't moving the needle.
His current house is apparently worth $730k. The new place will be almost $900k. Subtract realtor fees and transaction costs from $730k and you're under $700k...and that difference between proceeds from sale and what he would pay for the new place appears to be approximately $200k.
It sounds like he may just want to move into a new house without pulling any additional money from investments--he just wants to roll over his existing home equity and take a mortgage for the rest. If so, the rest of the rationale is just justification.
But, yes, anyone who has a taxable investment account at the same time as a mortgage has decided to have an unnecessary mortgage in order to invest. He will likely be better off taking the mortgage than with not investing the $200k, but it isn't guaranteed. Given his net worth and nice income, it likely doesn't matter a bit which way he goes. Since he seems to have some preference for not putting a large additional amount into his house, then "let" him take out the $200k mortgage with your blessing. In 15 years the difference between what was (in retrospect) the better choice is very unlikely to be even as much as 2% of his portfolio (say, $100k out of $5MM), which isn't moving the needle.
Re: Taking an unnecessary mortgage in order to invest
My initial reaction was "not a good idea"...until I saw their other total assets and believe it is a very reasonable approach.
Re: Taking an unnecessary mortgage in order to invest
I wouldn't do it out of simplicity even if the numbers technically work out. The loan is only 5% of net worth, seems insignificant and won't make much of a difference either way, hence I lean toward simplicity.
Re: Taking an unnecessary mortgage in order to invest
The "market" will likely beat 2.25% over 15 years... but he wants to "play" with the money and individual stocks and options may not beat 2.25%bradpevans wrote: ↑Fri Aug 20, 2021 12:02 pmdefscott627 wrote: ↑Fri Aug 20, 2021 8:09 am My in-laws wanted me to post this here - they are 64 and 62, selling their house (my wife's childhood home) for $730k (they have no mortgage). They are buying a 55+ townhouse nearby and could have paid for the entire townhouse in cash (the townhouse will be closer to $900k) but my father-in-law decided he wanted to play with $200k instead of "tying it up in the house" and wants to take out a 15-year $200k mortgage (2.25% interest). His rationale is that he believes the market will return more than that over the next 15 years.
For a little more info - he is still working (~200-275k salary depending on the year - he is a business owner) -- they are worth around $4 million if you include the townhouse as an asset, so this dollar amount is not exactly a huge portion of their net worth or their monthly income.
What are your thoughts on this? I don't love the idea of taking out a loan to gamble with returns, but at the same time the risk seems to be relatively low considering their solid financial status?
if we can't get 2.25% in the market over 15 years ... what are we doing?
Plus, why pay interest at all? Doesn't he have any other money to play with? If he has 4 million is it already 100% in the stock market? Or does he have some in bonds or cds or cash?
He should use THAT money to start a play account if he feels the need to play.
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Re: Taking an unnecessary mortgage in order to invest
I would not do it. However, assuming that they are pricing the townhome at 900K in their $4 million net work, and there have 3.1 million in existing cash/investments, and he is still working and generating income, the worst case loss of $220K will not impact them much.
The unknown concern is discipline to stick to nly using that $200K, and not pulling other money to case after it during a period of market loss. If he cannot accept losses and decides to start putting money beyond the $200K into this activity, it could quickly destabilize their financial situation.
The other issue is, what plans has he put in place if he dies before the 15 year period, is he going to leave this situation for his wife to deal with.
The unknown concern is discipline to stick to nly using that $200K, and not pulling other money to case after it during a period of market loss. If he cannot accept losses and decides to start putting money beyond the $200K into this activity, it could quickly destabilize their financial situation.
The other issue is, what plans has he put in place if he dies before the 15 year period, is he going to leave this situation for his wife to deal with.
Re: Taking an unnecessary mortgage in order to invest
I think the word choice "play" is the OP's negative spin on an otherwise reasonable proposal
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Re: Taking an unnecessary mortgage in order to invest
If they own at least $200k in bonds, why not sell those bonds and use that as the play money? If not, they are borrowing at 2.25% and lending out with their bonds at something less.
I would recommend not taking out the mortgage. I thought you're supposed to quit playing once you won the game, not borrow to get more chips to play with.
I would recommend not taking out the mortgage. I thought you're supposed to quit playing once you won the game, not borrow to get more chips to play with.
Re: Taking an unnecessary mortgage in order to invest
This. If he owns bonds and carrying a mortgage, he's both borrowing and lending and probably paying more in interest than he's getting. If he doesn't own bonds, he's pretty aggressively invested for someone his age. But his overall concept is sound if he's OK with the added risk.PowderDay9 wrote: ↑Sat Aug 21, 2021 2:09 pm If they own at least $200k in bonds, why not sell those bonds and use that as the play money? If not, they are borrowing at 2.25% and lending out with their bonds at something less.
I would recommend not taking out the mortgage. I thought you're supposed to quit playing once you won the game, not borrow to get more chips to play with.
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Re: Taking an unnecessary mortgage in order to invest
I think a couple in their 60's who was smart enough to save 4 million bucks, who will probably only live to 77 on average, should do whatever the heck they want. Whether or not any youngsters think it's a good or bad idea.
Re: Taking an unnecessary mortgage in order to invest
If the wife is 62, she has a life expectancy of 85: https://www.annuityadvantage.com/resour ... cy-tables/SethJane42 wrote: ↑Sat Aug 21, 2021 3:45 pm I think a couple in their 60's who was smart enough to save 4 million bucks, who will probably only live to 77 on average, should do whatever the heck they want. Whether or not any youngsters think it's a good or bad idea.
But I agree with your overall sentiment.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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Re: Taking an unnecessary mortgage in order to invest
Sorry for not responding to anyone in a few days! Yes, the word "play" is what I used --- it wasn't intentional, but perhaps it was subliminal in that I don't personally think the idea of using a mortgage to invest more in the market (especially when the amount is such a low % of their net worth) is a great move.
To answer other people's questions, I do not know their asset allocations - we really only had a surface-level discussion when he had asked me to post here, so I had asked him a few details about his situation (we've spoken before about finances so it wasn't like he was divulging information that he hasn't already told me), but I can guarantee that he has a percentage of his portfolio in bonds. The exact percentage, however, I am not sure.
The 200k number, as another poster suggested, most likely is the new townhouse minus the old house. I suppose he didn't want to pull money from anywhere else to cover the 200k so he instead is taking out the mortgage. Closing costs for it will be around 5k I think he said.
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Re: Taking an unnecessary mortgage in order to invest
Watty wrote: ↑Fri Aug 20, 2021 10:17 am At their age they likely have something like a 50/50 stock asset allocation which would mean they have around $2 million in bonds that are earning around 1% after taxes. Taking out a $200K loan at 2.25% makes little sense when they have that much in bonds that is earning a lower interest rate.
With the play account he might even hit a trifecta of taxes and in addition to normal capital gains taxes his investments might also generate lots of other taxes so he should know the tax impact ahead of time. For example it could trigger;
1) IRMAA taxes
2) NIIT taxes
3) Cause more of their social security to be taxed.
One of the huge advantages of having a paid off house is that you do not need to pay taxes on the income needed for the imputed rent. My situation is much different but having a paid off house allows me to stay in a low tax bracket.
+1Katietsu wrote: ↑Fri Aug 20, 2021 4:56 pm Assume I had $2 million in equities and $1 million in fixed income. I would not be asking if an extra $200k in stocks would beat the mortgage. I would be asking if an extra $200k in fixed income would be the mortgage. The comparison of stocks to mortgage is completely different risk. You could just not take out a mortgage and increase your asset allocation towards equities if you want more risk.
Total Portfolio Allocation and Withdrawal (TPAW)
- Harry Livermore
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Re: Taking an unnecessary mortgage in order to invest
I think it's perfectly fine; 64 seems relatively young (to me, now at 55) and he is still working.
It's not something that I would personally do.
Someone upthread mentioned IRMAA. I think it's wise to maybe compare the delta of extra returns from the money "not tied up in the market" and the necessity of business income (or trading/ selling to harvest gains) in order to pay the mortgage with after tax dollars, that may trigger steep IRMAA surcharges until the mortgage is paid off... at which point they are into RMD land where the surcharges continue...
But if he's working anyway, there will be income, and probably IRMAA surcharges, regardless...
Cheers
It's not something that I would personally do.
Someone upthread mentioned IRMAA. I think it's wise to maybe compare the delta of extra returns from the money "not tied up in the market" and the necessity of business income (or trading/ selling to harvest gains) in order to pay the mortgage with after tax dollars, that may trigger steep IRMAA surcharges until the mortgage is paid off... at which point they are into RMD land where the surcharges continue...
But if he's working anyway, there will be income, and probably IRMAA surcharges, regardless...
Cheers
Re: Taking an unnecessary mortgage in order to invest
We did this May 2020. Sold a house with no mortgage. Could have paid cash for the new house but took out a $500k 30 year 2.75% fixed rate mortgage. Made $124k (net of interest) so far by investing the $500k in our 60/40 portfolio. Just refinanced to 2.25%. Retired Mar of this year @ 55. Plan to keep the mortgage until it irritates me too much.
2.25% 30 year money is dirt cheap. 10 year break even inflation is at 2.27% so it’s free real dollars. My stable value fund is paying 2.34%, so it’s free nominal dollars at risk parity. Seems like a no brainer if the withdrawal rate to support the mortgage doesn’t cause other issues (ACA, IRMAA, etc…).
2.25% 30 year money is dirt cheap. 10 year break even inflation is at 2.27% so it’s free real dollars. My stable value fund is paying 2.34%, so it’s free nominal dollars at risk parity. Seems like a no brainer if the withdrawal rate to support the mortgage doesn’t cause other issues (ACA, IRMAA, etc…).
Consistently sets low goals and fails to achieve them.
Re: Taking an unnecessary mortgage in order to invest
All of these let’s remortgage our home to buy stocks threads reminds me of the dot com days. Atleast this time around it seems like everyone is dumping money into index funds rather than hot tech stocks, though to be honest as this forum tends to be much more financially cautious than the average population, it does make me a bit nervous to see so many saying the same thing: “borrow as much money as possible and buy S&P500”
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Re: Taking an unnecessary mortgage in order to invest
A mortgage during those days (in the year 2000) was around 8%. The OP is a multimillionaire wanting to borrow an amount that is a small percentage of their assets at roughly 2%. Inflation alone is reasonably likely to be higher and the chances they come out on top with this deal are tilted in their favor. If they do lose the bet, they are in a position to shrug it off.hoofaman wrote: ↑Mon Aug 23, 2021 8:04 am All of these let’s remortgage our home to buy stocks reminds me of the dot com days. Atleast this time around it seems like everyone is dumping money into index funds rather than hot tech stocks, though to be honest as this forum tends to be much more financially cautious than the average population, it does make me a bit nervous to see so many of these threads that are essentially: “borrow as much money as possible and buy S&P500”
The OP doesn’t need to take this risk but they are both willing and able and it’s not all much risk either since they may hardly notice if the entire amount they plan to do this with were to evaporate. Assuming they invest in something like a total stock market fund, chances are pretty good that they’ll do more than fine. It’s not guaranteed outcome but it’s not exactly a coin flip either.
I do wonder if people who are debt averse would be willing to encourage the OP’s plan at any interest rate. What if the loan were at 1% or even 0.1%? Assume inflation is at the historical average of approximately 3%.
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Re: Taking an unnecessary mortgage in order to invest
This appears to be a very low-risk decision. I vote go with personal preference.defscott627 wrote: ↑Fri Aug 20, 2021 8:09 am ...he wanted to play with $200k instead of "tying it up in the house" and wants to take out a 15-year $200k mortgage (2.25% interest).
...he is still working (~200-275k salary ...) -- they are worth around $4 million if you include the townhouse as an asset, so this dollar amount is not exactly a huge portion of their net worth or their monthly income.
Seems like the pure boglehead response would require referring to his IPS
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Re: Taking an unnecessary mortgage in order to invest
One of them will probably make it into their 90'sSethJane42 wrote: ↑Sat Aug 21, 2021 3:45 pm I think a couple in their 60's who was smart enough to save 4 million bucks, who will probably only live to 77 on average, should do whatever the heck they want. Whether or not any youngsters think it's a good or bad idea.
Retired June 2023. AA = 55/35/10
Re: Taking an unnecessary mortgage in order to invest
I think it is fine given their assets and cashflow. That is, as long as “play” doesn’t mean writing uncovered options on Tesla and Gamestop.
“Doing well with money has little to do with how smart you are and a lot to do with how you behave.” - Morgan Housel
Re: Taking an unnecessary mortgage in order to invest
OP
When I did this in 2005, a no cost home equity loan interest was below inflation rate. I didn’t look at the other costs noted above, not a savvy move on my part. I did make a profit which became my emergency fund and then was used as after tax account to pay Roth conversion tax. My after tax account wasn’t big, mostly I had tax deferred accounts for nearly 100% of my investments. I like to think the after tax account was fueled by magic. More likely just good fortune.
Also paying a mortgage while working is like forced savings on top of your 401k, tIRA, etc. Most of you don’t likely need such motivation.
HVAC
When I did this in 2005, a no cost home equity loan interest was below inflation rate. I didn’t look at the other costs noted above, not a savvy move on my part. I did make a profit which became my emergency fund and then was used as after tax account to pay Roth conversion tax. My after tax account wasn’t big, mostly I had tax deferred accounts for nearly 100% of my investments. I like to think the after tax account was fueled by magic. More likely just good fortune.
Also paying a mortgage while working is like forced savings on top of your 401k, tIRA, etc. Most of you don’t likely need such motivation.
HVAC
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Re: Taking an unnecessary mortgage in order to invest
He's probably right that stocks will outperform the 2.25% nominal interest rate, even after taxes.
But the key word there is probably. Leverage like this increases both upside potential and downside risk. To the extent that he will be withdrawing from the invested portfolio to help pay the mortgage, this is certainly increasing sequence of returns risk.
If he's aware of the risk involved and is willing and able to accept it, then I don't see a compelling reason why he shouldn't do it.
But the key word there is probably. Leverage like this increases both upside potential and downside risk. To the extent that he will be withdrawing from the invested portfolio to help pay the mortgage, this is certainly increasing sequence of returns risk.
If he's aware of the risk involved and is willing and able to accept it, then I don't see a compelling reason why he shouldn't do it.
The Sensible Steward
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Re: Taking an unnecessary mortgage in order to invest
Why not borrow more for the new home and rent instead of sell their house eventually passing childhood home to wife? What does mother-in-law do -- could she get "real estate professional" status now managing this rental and have paper losses offset father-in-law income on their joint tax return?defscott627 wrote: ↑Fri Aug 20, 2021 8:09 amMy in-laws wanted me to post this here - they are 64 and 62, selling their house (my wife's childhood home) … but my father-in-law decided he wanted to play with $200k instead of "tying it up in the house" … he is still working
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Re: Taking an unnecessary mortgage in order to invest
Not to hijack the thread - but who gave that rate and was it on < or > 150k?Miguelito wrote: ↑Fri Aug 20, 2021 11:51 am We just did a mild version of this. We could pay off our mortgage, but decided to refi this month from 9 years left to 15. Last year we had 7.5 years left and refi'ed to 10. Rates on our mortgage dropped from 3 to 2.5 last year and to 1.875 just now. Our mortgage payment is lower by a lot. We don't need the added cashflow, but it's nice to have, and the difference is being invested at what I hope over 15 years will easily beat 1.875%. We don't deduct interest so there is not advantage from that end either.
Re: Taking an unnecessary mortgage in order to invest
I think it is a good idea. 2.25% money with inflation running more than that, maybe much more soon, sounds pretty good to me. I suspect the borrower here understands leverage quite well.
I have two questions:
1. Why 15 years at 2.25% when 30 years @ 2.5% is available?
2. Why stop at $200K when $500k or $600k would be available in a conforming loan?
Go big or go home. I just turned 76 and have more than he is talking about leveraged in a very similar way.
Answering a question is easy -- asking the right question is the hard part.