Borrow $150k at 2.4% and invest in the market?

[JEDI]

i have $150k/10yrs left on my 4% mortgage.

at 40% (fed+state) tax rate, the mortgage is effectively 2.4%.
i pay $3k/month which is above the minimum payment required.

it should be a no brainer to invest other people's $ at 2.4%.

but if i pay it off, i have $36k/yr more.
in 4yrs, i'll have $150k again but w/o the interest payment. so it's like an instant +2.4% gain.
so instead of investing $150k today, i'm investing $150k over 4yrs. year1= $36k. year2 will be $72k, year3 = $108k and yr4= $150k.


Dont pay it off and invest the $ instead:
is 2.4% worth the gamble that the market wont go down in the next 4yrs?

Pay it off and (partially) defer investing:
instant 2.4% gain. and it's not like i'm completely out of the market.
Instead of $150k at year1, i'll have $36k. so i'm still partially invested.


what say you ATOT? invest or payoff the mortgage?
WHY?

 

[Powermoloch]

The sooner you pay off the principle, then more money you'll save and gain over time in your pocket for future investments.

 

[Mike Gayner]

The sooner you pay off the principle, then more money you'll save and gain over time in your pocket for future investments.

ITT: people who dont understand leverage.

 

[mizzou]

pay it off first


oops: forgot WHY

-because I am a low risk kinda guy

 

[dawp]

Investing burrowed money is a bad idea. I believe it was one of the main causes of the crash of '29. Borrowers lost a shitload of money and couldn't pay it back after the stocks took a nosedive.

 

[ShawnD1]

Investing burrowed money is a bad idea. I believe it was one of the main causes of the crash of '29. Borrowers lost a shitload of money and couldn't pay it back after the stocks took a nosedive.

Happened in 2008 as well.

-get "investment" house with no money down
-your plan is to let the value of the house go up then sell it
-prices stop going up
-interest rates go up
-there's a margin call (you need to pay the mortgage)
-you can't pay the margin call so you sell the house
-everone does this
-your house is worth nothing and you still owe money!!!!
-bank run
-shiiiiiiiiiiiiiiiiii :'(

 

[rcpratt]

I feel like you make this thread every month.

 

[mshan]

Stop paying off more than actual mortgage payment (unless you are close to retirement and get peace of mind that you own outright house) and use that money to invest in market (I am assuming you have a conventional 30 year fixed, not a pick a payment, negative amortization loan which had teaser rate for first two or three years).

But I wouldn't gamble borrowed money in stock market if house is collateral for that loan.

 

[sunzt]

I'm a little inexperienced in this field, but is the reason you're getting 2.4% effective interest because the mortgage interest deduction is 100% off of your tax owed? Do you get that money even if you have no tax liability?

 

[Jumpem]

Pay off the mortgage first.

I save 10% in my 401k currently. My plan is to pay off student loans by the end of 2013, the mortage by the end of 2017, and then ramp up savings/investments.

 

[silverpig]

It depends on your risk aversion/affinity.

IMO you should never gamble with your primary residence. If it was a mortgage/series of mortgages on an investment property/properties, then sure, leverage it up.

The problem which led to the 2008 crisis was everyone seeing their primary residence as an investment, and not as a home.

 

[Baasha]

It really depends on your risk tolerance and how much $150k means to you in the long run.

If you don't have too many responsibilities other than yourself and your possessions (married? kids?), it would make much more sense to invest the capital and use that as leverage to see a nice return over 5+ years.

If you are highly risk-averse, then you already know the answer.

The only certain thing about the market is that nothing is certain. If you cannot afford to lose the $150k under any circumstance whatsoever, do NOT put it in the market. However, there are PLENTY of other ways of investing that capital in order to realize a solid return in the near future.

Such an amount is perfect as a nest-egg if you have children.

You should prioritize your expenses from a top-down approach over the next five years.

If you don't foresee any large expense coming up, sans emergencies of course, investing it in the market can turn out to be prudent in hindsight.

2.4% is a measly return and even a dunce of a money manager can get you that. Matter of fact, research certain financial instruments that have a five year yield. Some of them are north of 5% with minimal risk.

At the end of the day, nobody will look after your money better than yourself. Even if you don't fancy yourself as a savvy investor, spend the time and research the investment(s) and make an informed decision. Remember, in life, nothing of real value comes easily.

Good luck!

 

[Capt Caveman]

I did, investing in Visa's IPO. 78% + quarterly dividend > 2.4%

 

[the DRIZZLE]

Whatever you do make sure you are comparing apples to apples. Since you are looking at the after tax cost of debt make sure you make your decision based on after tax returns in the market.

 

[JEDI]

ITT: people who dont understand leverage.

Mike Gayner
Banned
Join Date: Jan 2007
Location: Tauranga, New Zealand
Posts: 4,863

apparently he's been banned in the past hour since he posted in this thread about an hr ago. but search doesnt show any other of his posts in the past hr?

why was he banned?

 

[DaveSimmons]

The main advantages of keeping the money in other investments instead of paying down the mortgage are:
- chance for higher gains, but with more risk
- investments are liquid, while you may not be able to pull cash out of your house equity in an emergency

Being mortgage-free would be nice, but I like having enough in my brokerage account that I could take a year to find my next job if I needed to without any hardship and without touching my 401k. Once in a while I even fantasize about quitting work just to take a nice long vacation.

 

[shortylickens]

Gaynor got banned again?

WHAT THE FUCK?

Dude hates the mods more than I do!

DAMN!
http://forums.anandtech.com/showpost.php?p=31705132&postcount=23

Fuckin hard core.

 

[JMapleton]

If you have to ask this question to ATOT, you do not know enough about investing to do this.

Pay off your mortgage and go the safe route.

 

[Nintendesert]

Honestly, you can't go wrong with hookers and blow. It works for Charlie Sheen.

 

[Acanthus]

I wouldn't buy in big at this point. Wait until the fed raises rates. 2 Quarters after the fed stops giving away free money you should see how the market is really doing.

Wait for the dive, then buy in.

 

[blinblue]

Mathematically you'd be better off investing, however personal finance is more than just math.

Lets reverse the scenario a little, say you had a fully paid for house, would you go out and take a $150k mortgage to invest that money in the stock market?
If the answer is still yes, and if you understand the risks, then do whatever you want. Just consider what happens in the worst case (invests sour for a bit and you lose your job, for example) and go from there.

Personally I'd want a paid for house because the thought of not owing anyone anything is very appealing to me.

 

[dquan97]

Depends on your whole financial standing. Do you already have 6-12mos worth of emergency funds? Maxed out Roth IRA? How's the job security? Any big expense coming up?

 

[JMapleton]

Mathematically you'd be better off investing, however personal finance is more than just math.

If he had invested in an S&P index fund exactly 10 years ago, would he have been better off? You cannot assume the market will always go up.

 

[blinblue]

If he had invested in an S&P index fund exactly 10 years ago, would he have been better off? You cannot assume the market will always go up.

Yeah, $1 invested 10 years ago would be about $1 right now (not including inflation). 10 years is the general rule of thumb for good returns, 2008 really screwed that up though. Though looking at historic CD rates from ~2000 you could get >5%
But yes, stock market is risky, though not much in the long run. Picking 15 year periods give you nice returns (S&P from 1995 to 2010 would give you 8.45%)
Going with the 4 years in the OP, I personally wouldn't invest in the stock market for 4 years and feel confident that I'd be ahead at that point. If you can't keep it in long term, I wouldn't bother with it in the first place.

Like I said, you really have to consider all the risks. There's the real risk of losing your job, your health, or having some other emergency. Which is why I would much rather have the very real security of having a paid for house.

 

[Patranus]

LOL - Is this a serious question?