"Gene E. Utterback, EA" <eagent[at]alliancetax.com> writes:
- quote -

The problem with this statement is that it kind of implies
that if one has any stock and bond investments he ought to
liquidate them to pay off an outstanding mortgage. There's
no difference between "taking out a mortgage to invest" and
"taking out a mortgage while keeping investments" (except,
perhaps, with respect to, say, what it would take to liquidate
investments - ie. taxes, penalties, etc). If you forget _how_
one ends up with a portfolio of stocks and bonds as well as
a mortgage, and just look at the static picture, would you
say that anyone with stocks and bonds _and_ a mortgage is
making a mistake? I'd say no, probably not.

I figure it's like this. There are arguments for maintaining
the mortgage and an investment portfolio which typically go
like "okay, which one has the higher risk-adjusted return".
That's only half the picture. There are other issues as well,
I believe - one is diversification, but the most important
one as far as I'm concerned is that of liquidity. If one
has a fully paid for house but no liquid investments, then
one is facing a very serious problem if he or she should,
say, lose his job. Exactly the moment when he would need
to tap a home equity line (since selling a house just to
get some cash is probably not a good idea) is exactly the
moment when he's most likely to lose that credit line and/or
not reasonably be able to apply for one.

At a minimum, that's an argument for maintaining some substantial
liquid investments - whether it's a diversified portfolio or
just emergency cash - regardless of whether the return beats
the return on one's house and mortgage.

- quote -

HELOCs can go away. Particularly if one's circumstances
change.

- quote -

A HELOC is not a safety net.

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

"Ron Peterson" <ron[at]shell.core.com> wrote in message
news:b2f196ff.0401210649.48e089d5[at]posting.google.com...
- quote -

I have always had a problem with taking out a mortgage to invest in the
market. I know all the arguments, I just don't like it.

What I have not seen offered, and what I think is certainly something the OP
should think about is a HELOC. If he qualifies for a Home Equity Line of
Credit he could get access to funds should he need them. However, his only
obligation to repay would occur IF he drew against the line. If he never
draws anything there should be no payments due.

This would provide him with a bit of a safety net in case he needs to access
the equity in the home while not tying up the money elsewhere.

Just a thought,
Gene E. Utterback, EA

sizzlemp[at]aol.com (SizzleMP) wrote in message news:<20040119230435.04554.00000391[at]mb-m10.aol.com> ...
- quote -

Although, I think that it would be good to buy the house outright, it
might be more prudent to get a loan for $100-200,000 to invest in
stocks and municipal bonds. Your, mortgage payments would be
reasonable, and you can benefit from the higher returns that stocks
deliver. I am not sure, but munis might give you a higher return after
taxes than what the loan may cost you.

--
Ron

I can tell you that in 1996 I had a similar decision and I took the
mortgage and put the savings in 80% stocks/stock mutual funds and 20%
bonds and cash. Things are always changing, but my 1, 3, and 5 year
returns are 29%, 5%, and 5% (these are annualized returns). I took the
7 year ARM (few people stick with a mortgage beyond 7 years and it
gets you a lower interest rate). The house has appreciated from $229K
to $400K, so it has done well also (about 8% a year, I think). I have
been refinancing (3 times in 7 years, whew!) and currently have a
5.25% mortgage. My "effective" interest rate is about 4% (due to the
tax break on mortgage interest) so it turned out I made the right
decision. I also like the "cushion" having all that money to rely on
if I loose my job or have a health problem. I also like investing it.
I've become pretty good at it. Its not hard with mutual funds and I
now own about 20 different stocks.

You don't know what the stock market, job market and real estate
market will do in the future, but you don't know what you are going to
do in the future either, so either way its a gamble. If you are
totally set in life with your job, wife and want to stay in this house
forever, go ahead and pay it off it makes you feel good, but odds are,
strictly financially speaking, you will be better off taking the
mortgage and investing the cash.

sizzlemp[at]aol.com (SizzleMP) wrote in message news:<20040116060928.19387.00000041[at]mb-m26.aol.com> ...
- quote -

- quote -

This is the very reason why I would like to buy the house outright. Nothing
worse than losing your job and still having to send in that $2,500 mortgage
payment every month. Job security in my opinion is on the back of most peoples
minds, but for some reason I always prepare for the worst. There is no such
thing as a secure job.

"TTRoberts" <ttroberts[at]aol.com> wrote
- quote -


- quote -

I don't have a good analogy. Yours just strikes me as failing to recognize the
issue is far more about liquidity and risk to principal than it is about losing
purchasing power. I'd say the house's value is likely going to keep up with
inflation in the long term. It's no mattress. You're just saying it is a
mattress *relative* to what you think the return will be on another investment
vehicle.

Using that reasoning, putting one's money into high grade corporate bonds is a
mattress compared to putting the money into stocks.

So why do people buy high grade bonds? Less risk. If you want to call anything
low risk a mattress, well, I think this fails to capture a lot of perfectly good
motivations for choosing low risk vehicles.

Anyway, just my opinion. I realize what logic you're using. I just think the
metaphor exaggerates the perils of putting the money into low risk vehicles.

"TTRoberts" <ttroberts[at]aol.com> wrote
- quote -

Depending on the range of the expected yield, you bet I'd consider it.

I don't have an objection to the basic idea of your plan. Indeed, I have several
thousand dollars of credit card debt (something extremely rare for me) at 1.9%
that I could pay off today, except that the instruments I'd use to pay them off
are paying a higher interest rate. So I'm waiting until the last minute (namely,
the date when the credit card company's rates change) to pay off the credit card
debt.

Your particular plan for this particular situation is just a bit outside my
comfort zone for the current fascinating economy for the "short term." Thus I
myself would go with paying down the house.

More on "short term" below.

- quote -

I think since we're relying on income from the guy's job to be a big factor in
this scenario, and since the guy hasn't made clear how stable his job is (if
that even can be guessed at), we have to talk short-term.

- quote -

Sure. Again, I don't reject your plan outright. And I'm not saying that to be
nice. I think there are instances where a person who wants to end up financially
ahead should most certainly leverage.

- quote -

Here I sit in my box... ;-)

snip
- quote -

Good idea, especially about the clarifications.

"Caroline" caroline10027remove[at]earthlink.net , you responded:

<< <I> > Note, I never said anything about any kind of guaranteed annual yield
of 7%.

It's just your premise for this argument, correct. </I> >
No, it was an example of how I might doe it. Once can choose any number
they're comfortable with to see if it works for them or not . . .and whether
any risk (as they may perceive it) is worth it or not.

<< <I> > With the right investment risk, it's not all that risky . . . even in
"today's
- quote -

This is a very subjective issue.</I> >
. . . .I suppose it is.

<< <I> You're not thinking outside the box. You're attempting to predict the
short-term
future of financial markets.</I> >
Sorry, I don't understand how you get the idea I'm trying to "predict"
anything. I've simply suggested a calculated risk (however small or large one
might perceive it might be).

<< <I> You're speculating that 7% is a likely return for *each* of the next ten
or so years, with no declines in any year, so the guy would be safe each year.
</I> >
Average Annual Rate of Return (sometimes just referred to as an annual return)
is not the same as what one gets "each" year. And safety in the way you seem
to be looking at it can be achieved too, but with some caveats.

<< <I> I say that's a risky proposition. If you'd said 4%, using investment
grade bonds, I'd buy this. But 4% isn't likely to beat many realistic mortgage
interest rates for this scenario right now. </I> >
Ok. So, what would you say if principle is simply guaranteed, but the yield
may vary from year to year?

<< <I> The uncertainty of such short-term predictions is far greater than the
uncertainty of long-term predictions. This is where I think you're so out of
the
box as to be on the Planet Mars. ;-) </I> >
If I hadn't mentioned it before, be sure to understand I'm not suggesting
anything that might be a short duration investment period. If your thinking
in terms of the short-term, then I would certainly agree with your position.
And remember how I started all of this . . .I don't know other financial
details of the person and I can't say whether such an approach would be
appropriate or not. Then I gave an example of what I might do given what
information was available since I do know all of the details of my own
situation.

BTW: As much as I'd like to take a trip to Mars, I haven't made it there yet
and it doesn't look like it's going to happen in my lifetime. <VBG> ;-)


<<<I> ======================================= MODERATOR'S COMMENT: Ok, we have
different views. Since we have each (overtly) called the other an idiot,
unless new information is provided, future posts will be returned to the
poster. -HWW </I> >
<b> Moderator: </b> I feel you're being way overly sensitive here. And you can
be sure that I was NOT suggesting (overtly or otherwise) that anyone was an
idiot or anything likewise. I haven't even felt that the remarks were idiotic
and even if I were to suggest that, that would be very different from calling
someone an idiot. Please continue to allow differences of opinion . . .AND
clarifications of opinions and statements. Sincerely, TTR

"Caroline" caroline10027remove[at]earthlink.net, you responed with:

<< <i> "TTRoberts" <ttroberts[at]aol.com> wrote
- quote -

This is at least the second time you've made this analogy.

I think it's awful. A home generally appreciates in value, keeping up with
inflation over a 20-year period or so. It's not at all like stuffing the money
into a mattress.

You have some good points but this analogy is very misleading.</i> >
Hmmmm??? I'm interested in just why you feel this is misleading.

I used this analogy because the home "generally appreciates in value"
regardless of how much is paid to or accumulated as equity/principal.
Therefore, I see it being no different than putting this money where is does
nothing (e.g. under a mattress, in a tin can on a shelf for buried in the
ground).

If you have a better analogy, I would certainly love to hear it.

"TTRoberts" <ttroberts[at]aol.com> wrote
- quote -

I suggest that he put aside part of his monthly income *not* going towards a
mortgage for a bigger emergency fund. :-)

- quote -

It's just your premise for this argument, correct.

- quote -

This is a very subjective issue.

snip
- quote -


You're not thinking outside the box. You're attempting to predict the short-term
future of financial markets. You're speculating that 7% is a likely return for
*each* of the next ten or so years, with no declines in any year, so the guy
would be safe each year. I say that's a risky proposition. If you'd said 4%,
using investment grade bonds, I'd buy this. But 4% isn't likely to beat many
realistic mortgage interest rates for this scenario right now.

The uncertainty of such short-term predictions is far greater than the
uncertainty of long-term predictions. This is where I think you're so out of the
box as to be on the Planet Mars. ;-)


======================================= MODERATOR'S COMMENT:
Ok, we have different views. Since we have each (overtly) called the other an idiot, unless new information is provided, future posts will be returned to the poster. -HWW

"TTRoberts" <ttroberts[at]aol.com> wrote
- quote -

This is at least the second time you've made this analogy.

I think it's awful. A home generally appreciates in value, keeping up with
inflation over a 20-year period or so. It's not at all like stuffing the money
into a mattress.

You have some good points but this analogy is very misleading.

anoop[at]alumni.duke.edu (Anoop Ghanwani), you wrote:


<< <I> I guess the primary assumption that is being made here is that he will
earn a higher rate of return than what he pays for the home loan. </> >
Yes, that's a part of it. But more too the point you can have a large sum of
money that is now compounding instead of just sitting under the mattress
loosing purchasing power. And the debt/interest over time is being paid with
inflated dollars.

<< <I> I think <b> there's a small chance</b> that this might not happen and he
could also end up worse off than he would be had he bought it outright. </i> >
I agree. I didn't say or suggest that there is absolutely no risk involved.
But the better this is managed the smaller the chance/risk.

What I see as the biggest risk here is the interest rate risk in using an ARM
instead of a current low fixed rate loan. But this can also be managed to some
extent to reduce the risk through re-fi's using the same Option ARM type of
loan.

"Caroline" caroline10027remove[at]earthlink.net writes:

<< <i> If the guy loses his job for more than six months or has a pay cut, he
may very well need to cash in principal.</i> >
In such a case, I would argue it'd be much easier to "cash in principle" when
it's already out than trying to get at it through a loan when your unemployed
or when your pay may not qualify you for a low cost loan when you may very well
NEED it. Or would you suggest that credit card debt would be better? ;-)

<< <I> If the money is invested in something yielding 7% *every year*, IMO it's
fairly high risk in today's climate.</I> >
Note, I never said anything about any kind of guaranteed annual yield of 7%.
With the right investment risk, it's not all that risky . . . even in "today's
climate." But I do understand that some people have little to no tolerance for
investment risk. I'm not one of them.

<< <I> (Arguably right now the stock market is somewhat bloated again, to
boot.) So, disaster hits, and the homeowner must cash in some of the principal
*at possibly quite a loss.*</I> >
Given that one can think up anything that's possible, if one is set up with an
asset allocation that's low to moderate risk, have some access to principal may
not be near as much of a problem as you suggest. I would not be suggesting
that one is 100% equities when I refer to a 7% average annual return over the
long term.

<< <I> On the other hand, if the house is paid off, and the homeowner loses his
job or must take a pay cut, that's a huge mortgage payment he does not have to
worry about. </I> >
This is true . . . . but at what lost opportunity cost? It's not as though
there is no cost is taking this route either.

<< <I> Meanwhile, he's saved what would have gone towards he mortgage and
intereest and has this to add to the emergency fund already in place. </I> >
Yes . . . but could wind up with substantially less, which I would argue is
most often the case.

<< <I> One may argue it either way. I just think the biggest flaw in this
analysis is that 7% growth per annum is reasonably guaranteed <b> *every year*
</b> of the mortgage's life. It's a bad assumption IMO. Overall I would think it
inspired way more stress than it might be worth. </I> >
As I said above . . .that's not what I suggested to start with. But over the
long haul, I would expect this average annual rate from MY asset allocation.

<< <I> But to each his own.</i> >
Yup, exactly . . .

It's very difficult for many people to change their feelings and think a little
outside of their box. And then, they wonder why some others do better??? ;-)

ttroberts[at]aol.com (TTRoberts) wrote in message news:<20040117173707.19387.00000132[at]mb-m26.aol.com> ...
- quote -

I guess the primary assumption that is being made here is that
he will earn a higher rate of return than what he pays for
the home loan. I think there's a small chance that this might
not happen and he could also end up worse off than he would be
had he bought it outright.

Anoop

"TTRoberts" <ttroberts[at]aol.com> wrote
snip
- quote -

What I do not like about this scenario is its presumption of how little risk
there is to the homeowner's income and principal.

If the guy loses his job for more than six months or has a pay cut, he may very
well need to cash in principal. If the money is invested in something yielding
7% *every year*, IMO it's fairly high risk in today's climate. (Arguably right
now the stock market is somewhat bloated again, to boot.) So, disaster hits, and
the homeowner must cash in some of the principal *at possibly quite a loss.*

On the other hand, if the house is paid off, and the homeowner loses his job or
must take a pay cut, that's a huge mortgage payment he does not have to worry
about. Meanwhile, he's saved what would have gone towards he mortgage and
intereest and has this to add to the emergency fund already in place.

One may argue it either way. I just think the biggest flaw in this analysis is
that 7% growth per annum is reasonably guaranteed *every year* of the mortgage's
life. It's a bad assumption IMO. Overall I would think it inspired way more
stress than it might be worth.

But to each his own.

anoop[at]alumni.duke.edu (Anoop Ghanwani)

<< <i> What if he paid off the house now and started investing what would have
been the house payment? <b> Wouldn't that get him to a similar net worth in
15 years? </b> </i> >
No . . .not even close. There'd be about half a million or more
difference/less (note my amended post that address this point).

ttroberts[at]aol.com (TTRoberts) wrote in message news:<20040116125944.28505.00000130[at]mb-m01.aol.com> ...
- quote -

What if he paid off the house now and started investing what would have
been the house payment? Wouldn't that get him to a similar net worth in
15 years?

Anoop

- quote -

clears after buying my new house and selling my old house ( closings costs,
commissions, paying off the bank).

You mean the risk of taking out the loan compared to the risk of the
investment performance. That is function of how well you understand each of
the elements of risk and with that your tolerance

"HW "Skip" Weldon" <skip5700removethis[at]hotmail.com> wrote in message
news:aqof00p7sin44i3jqmg0es0b4sefpn5a6h[at]4ax.com...
- quote -

<< I just recently entered into contract for buying a $490,000 house. I
recently
put my house on the market and to my surprise I had gotten an offer in a couple
of days which I accepted for $430,000. I was originally going to take out a
mortgage but after doing some calculations I could actually buy my house now
with no mortgage and still have roughly $40,000 in the bank. .. >
If I may ask--do you have a mortgage on the house you are selling? If so, would
you have enough money after the mortgage, sales commissions, and other selling
costs are taken care of to buy your new house outright?

Mark A. Young