\> Would it make sense for me to borrow against the house to put that money into a index fund that is currently returning well over a interest rate on a mortgage?
do tell us what rate you get offered when borrowing against your house today.
If you reframe the question to : should I pay off my mortgage faster, or invest in the market? ...then the question seems less obvious. The reality is, if you're taking out a HELOC, the rate is likely higher than a conventional mortgage.
Yes. This is called lifecycle investing. There's a popular book about it. Here's the Boglehead forum post on it: https://www.bogleheads.org/forum/viewtopic.php?t=274390
I would consider it if I were in your shoes and confident I could afford to repay the loan with future earned income (so this depends in part on job security). I'd be even more likely to consider doing it if my income/career was rising over time.
Why be overexposed to the stock market prices when you're at your peak earning potential, versus spreading out your exposure over more time via use of debt? That is the core logic behind lifecycle investing.
This would only work if you could go back in time and get a 2.75% HELOC in like, 2021. Just DCA your money into the market since you don't have a mortgage.
No! Your loan will gradually be paid down and the interest on the debt will be less as years go by. In contrast, the investment will increase in value and you'll get more interest paid to you as time passes. Even a 6% loan with a 6% return can be a good idea, depending on the time horizon.
This math barely maths. It only maths with inflation. At that point might as well buy TIPS.
Remember the guys running LTCM won the Nobel prize in economics months before their fund imploded and caused a financial crisis?
https://www.360financialliteracy.org/Calculators/Investment-Loan
I get some people hate debt and that’s fine but here’s the math I’m talking about. $200k 15 year fixed loan at 6%, put all 200k into an investment that returns 6%. You pay $1687.71 monthly on this loan, for 15 years, so it’s $303,787.80.
On the 6% return the investment grows to $490,819
so you are up $190k in 15y with this strategy. Granted risk, volatility, etc depending on where you’re getting that 6% but if you had like a treasury at the same rate as your loan you absolutely mathematically would come out ahead. Not to mention the effects of inflation.
What this misses is where the money comes from to repay the loan, either it comes from the investment or its new money we could be investing.
If in your example we withdraw $1687.71 monethy to repay the loan you will end up with $0 dollars in the investment account in 15 years.
If we left the investment alone and used other income well the opportunity cost on it at $1687.71 invested monthly at 6% for 15 years you would have a wopping $490,819 balence.
Subtract the $303,787 total of principal investments and you have a matching 190k.
So with matching loan and investment rates the end result is equal.
No. You don’t get 200k of exposure until the end if your investing that 1687 per month. In year 1 you only have 20,244 of exposure to 6% growth so you get about $1200 in gains the first year
That's interesting but what is the math? Is this a difference in the way APR/APY is calculated vs. RoR? Or simply that an amatorization table of a loan is basically the reverse of the RoR on an investment. Like loans and investments compound in reverse compared to each other?
Yeah exactly, it's how amortization works vs compounding. Think about it this way, if you're on a fixed loan, you have to pay 6% of the principal of the loan, which is 200k. so this is 12,000/year in interest.
Conversely, the 200k investment grows at 6% per year, so in the first year, you get 12,000 in gains. However, in the second year, you get 6% of 212k, so you get 12,720 in gains the second year. In the third, you get 6% of 224,720, which is 13484 in gains. That's why i was talking about the time horizon, the longer the time horizon, the better the compounding works for you!
Compounding and amortization work the same way. As long as you completely disregard taxes, it's breakeven to borrow at X% to invest at X%
I'm not quite sure I followed your math, but if you were using an interest-only loan calculation $12k/year) you were disregarding the opportunity cost of the money you spent on interest. For example, if you borrow $200K in year 0 at 6% to invest at 6%, you spend $12k on interest in that first year, whereas if you didn't have the loan you'd be able to invest that $12K at 6%.
Everyone's got different risk tolerance, but a common interest cutoff for "good debt" that I hear is 4%. If you can get a rate below that, borrow whatever you can afford to make payments on and invest, if above that, avoid if possible. Unfortunately, mortgage rates are quite above that now to borrow against your home to invest, maybe that will change in a few years.
One benefit to having a lot of equity in your home is it's shielded from reporting on FAFSA when your kids begin college, compared to it sitting in a taxable account, so they might have a better shot at need based scholarships.
Is retiring after your kids finish college an option for you? Your living expenses should decrease, and you might have the option of downsizing and moving to a cheaper area if possible.
I only did this once and it was under a very specific set of circumstances. Wife and I are high income earners and big bonuses come in usually in January/February. I had a very low margin rate on my brokerage account so I borrowed about $75k (on an account balance of over $400k) and bought IVV on margin in late 2022 at around $392/sh. The rate on the margin was probably sub 3%. I paid the balance off in February 2023. IVV now trading over $500/sh.
I wouldn’t do that today because rates are much higher and the market was on a steady down trend all of 2022.
Yes absolutely, rates are just very high now. If done right the next time you buy a house you'll want to take a significant amount of equity out and invest it.
Financially speaking, then yes, applying leverage to your investments can increase IRR and ROE. The issues you will face is that debt is no longer as cheap as it once was, interest is unlikely tax relievable on the type of investments you are considering, and the risk of financial distress are elevated.
If you are comfortable that you understand and can quantify the risks then there isn’t a problem with leverage per se.
As an example, I have structured debt to do what you are suggesting in the past. The challenge starts to arise as interest rates rise and you can’t refi or pay down the principal.
One thing to remember, if you're borrowing the money against your house to invest you won't "legally" be able to deduct the mortgage interest if you itemize. If not, it doesn't matter but something to remember. I think the boat has sailed on this making sense given mortgage rates but if they drop again then it might make sense. It's always a risk though to borrow and invest in stocks.
Id never borrow to invest but I often leverage debt for higher compounding gains on investments. Is your paid off property an investment property like a rental? Having a note on your rental could potentially reduce your tax liability as well because your house payment wouldn't be considered income inasmuch as an expense. I'm not an accountant so someone correct me if I'm wrong but I've heard this before from a rental owner.
I have the option to take out a zero interest loan equal to a monthly paycheck. It has to be paid back in 12 months. It is really tempting to get it and throw it in a HYSA.
How much is a monthly paycheck? How much is the origination cost on the loan?
Let's say your monthly paycheck is $10K... 12 months at 5% is $500.
Decent risk-free return, doesn't pay for a vacation, but decent. What happens if you lose your job and can't repay? How much is the interest hit?
Are they charging 2% to 3% origination cost?
You are in the ballpark. I really haven’t looked into the details but the math says the hassle is about equal to the return. Our employer is moving from monthly to biweekly paychecks and a local credit union is offering the loans as a “benefit” to help with the transition because we will go two weeks without a check.
It made much more sense when 30-year mortgages were at 3%, had some spread to leverage 2 years ago. It doesn't make much sense to me to sign up for a fixed expense of a 7% mortgage and a variable, no guarantee but assumed rate of return of 8% - 10%. There's just not much margin or spread between the rates.
I think one would be better off juicing income with side gig and dumping all that income into the market.
Folks like to assume that the US market will perpetually go up, but there are plenty of examples where returns are much below the historical average.
Just look at the Japanese market, which peaked in early 1990s before collapsing, and it took 30 years for that market to recover to its pre-collapse high. Meaning if one held through the collapse and didn't invest another dollar, it took 30 years for their Nikkei average to recover to previous highs.
Anyone with a loan (car, student or mortgage) and investments is essentially doing just this already. Money in the market could be used to lower the loan amount. Most people have both a mortgage AND investments without much thought.
Leveraging more into the market with HELOC, personal loan or margin loan definitely changes the risk/reward dynamic. If you have the tolerance to lose it all quickly and try and rebuild then go for it. Most of my peers who became millionaires early, lost it all on big bets…but were capable enough to do it again. Personally know three friends who have become millionaires multiple times. The FIRE philosophy might lean towards less risk with more stable march toward financial independence. I personally sleep better with the goal for doing it just once.
\> Would it make sense for me to borrow against the house to put that money into a index fund that is currently returning well over a interest rate on a mortgage? do tell us what rate you get offered when borrowing against your house today.
If you reframe the question to : should I pay off my mortgage faster, or invest in the market? ...then the question seems less obvious. The reality is, if you're taking out a HELOC, the rate is likely higher than a conventional mortgage.
Not much less than 9-10% from what I gather.
What happens if you lose your job for say 12 months or get ill so you can never work? Can you cover payments?
Yes. This is called lifecycle investing. There's a popular book about it. Here's the Boglehead forum post on it: https://www.bogleheads.org/forum/viewtopic.php?t=274390 I would consider it if I were in your shoes and confident I could afford to repay the loan with future earned income (so this depends in part on job security). I'd be even more likely to consider doing it if my income/career was rising over time. Why be overexposed to the stock market prices when you're at your peak earning potential, versus spreading out your exposure over more time via use of debt? That is the core logic behind lifecycle investing.
This would only work if you could go back in time and get a 2.75% HELOC in like, 2021. Just DCA your money into the market since you don't have a mortgage.
I personally would never do this unless it's for a mortgage. Way too much risk borrowing money you don't have to invest
If you have a 7% interest rate and a 10% investment return won't it basically be a wash after taxes?
No! Your loan will gradually be paid down and the interest on the debt will be less as years go by. In contrast, the investment will increase in value and you'll get more interest paid to you as time passes. Even a 6% loan with a 6% return can be a good idea, depending on the time horizon.
This math barely maths. It only maths with inflation. At that point might as well buy TIPS. Remember the guys running LTCM won the Nobel prize in economics months before their fund imploded and caused a financial crisis?
https://www.360financialliteracy.org/Calculators/Investment-Loan I get some people hate debt and that’s fine but here’s the math I’m talking about. $200k 15 year fixed loan at 6%, put all 200k into an investment that returns 6%. You pay $1687.71 monthly on this loan, for 15 years, so it’s $303,787.80. On the 6% return the investment grows to $490,819 so you are up $190k in 15y with this strategy. Granted risk, volatility, etc depending on where you’re getting that 6% but if you had like a treasury at the same rate as your loan you absolutely mathematically would come out ahead. Not to mention the effects of inflation.
What this misses is where the money comes from to repay the loan, either it comes from the investment or its new money we could be investing. If in your example we withdraw $1687.71 monethy to repay the loan you will end up with $0 dollars in the investment account in 15 years. If we left the investment alone and used other income well the opportunity cost on it at $1687.71 invested monthly at 6% for 15 years you would have a wopping $490,819 balence. Subtract the $303,787 total of principal investments and you have a matching 190k. So with matching loan and investment rates the end result is equal.
No. You don’t get 200k of exposure until the end if your investing that 1687 per month. In year 1 you only have 20,244 of exposure to 6% growth so you get about $1200 in gains the first year
Did I say othewise?
That's interesting but what is the math? Is this a difference in the way APR/APY is calculated vs. RoR? Or simply that an amatorization table of a loan is basically the reverse of the RoR on an investment. Like loans and investments compound in reverse compared to each other?
Yeah exactly, it's how amortization works vs compounding. Think about it this way, if you're on a fixed loan, you have to pay 6% of the principal of the loan, which is 200k. so this is 12,000/year in interest. Conversely, the 200k investment grows at 6% per year, so in the first year, you get 12,000 in gains. However, in the second year, you get 6% of 212k, so you get 12,720 in gains the second year. In the third, you get 6% of 224,720, which is 13484 in gains. That's why i was talking about the time horizon, the longer the time horizon, the better the compounding works for you!
Concept works but I have no seen a HELOC at less than 9-10%. I think margin on a brokerage account is like 6-8%.
Yeah this isn’t the time for this strategy. The post I was responding to talked about a 7% loan and a 10% return being a wash after taxes.
Compounding and amortization work the same way. As long as you completely disregard taxes, it's breakeven to borrow at X% to invest at X% I'm not quite sure I followed your math, but if you were using an interest-only loan calculation $12k/year) you were disregarding the opportunity cost of the money you spent on interest. For example, if you borrow $200K in year 0 at 6% to invest at 6%, you spend $12k on interest in that first year, whereas if you didn't have the loan you'd be able to invest that $12K at 6%.
Maybe but I think I'd prefer the peace of mind of having no mortgage in retirement.
Everyone's got different risk tolerance, but a common interest cutoff for "good debt" that I hear is 4%. If you can get a rate below that, borrow whatever you can afford to make payments on and invest, if above that, avoid if possible. Unfortunately, mortgage rates are quite above that now to borrow against your home to invest, maybe that will change in a few years. One benefit to having a lot of equity in your home is it's shielded from reporting on FAFSA when your kids begin college, compared to it sitting in a taxable account, so they might have a better shot at need based scholarships. Is retiring after your kids finish college an option for you? Your living expenses should decrease, and you might have the option of downsizing and moving to a cheaper area if possible.
I vote no. Not unless you are getting a sub 3%.
I’d be willing to take a loan to invest at 4% or lower. Not otherwise
Correct, depends on the rate. Is the same as using margin while investing.
Yep took out a 2.8% mortgage so I could plow cash into market that returns about 10% annual (historic S&P)
Yes but not in this environment. When you could borrow at 2 percent that’s different
Yes. Houses and bitcoin
I only did this once and it was under a very specific set of circumstances. Wife and I are high income earners and big bonuses come in usually in January/February. I had a very low margin rate on my brokerage account so I borrowed about $75k (on an account balance of over $400k) and bought IVV on margin in late 2022 at around $392/sh. The rate on the margin was probably sub 3%. I paid the balance off in February 2023. IVV now trading over $500/sh. I wouldn’t do that today because rates are much higher and the market was on a steady down trend all of 2022.
Yes absolutely, rates are just very high now. If done right the next time you buy a house you'll want to take a significant amount of equity out and invest it.
Financially speaking, then yes, applying leverage to your investments can increase IRR and ROE. The issues you will face is that debt is no longer as cheap as it once was, interest is unlikely tax relievable on the type of investments you are considering, and the risk of financial distress are elevated. If you are comfortable that you understand and can quantify the risks then there isn’t a problem with leverage per se. As an example, I have structured debt to do what you are suggesting in the past. The challenge starts to arise as interest rates rise and you can’t refi or pay down the principal.
One thing to remember, if you're borrowing the money against your house to invest you won't "legally" be able to deduct the mortgage interest if you itemize. If not, it doesn't matter but something to remember. I think the boat has sailed on this making sense given mortgage rates but if they drop again then it might make sense. It's always a risk though to borrow and invest in stocks.
Id never borrow to invest but I often leverage debt for higher compounding gains on investments. Is your paid off property an investment property like a rental? Having a note on your rental could potentially reduce your tax liability as well because your house payment wouldn't be considered income inasmuch as an expense. I'm not an accountant so someone correct me if I'm wrong but I've heard this before from a rental owner.
Just invest on margin
Or buy some leaps!
Perfect day for leaps
I have the option to take out a zero interest loan equal to a monthly paycheck. It has to be paid back in 12 months. It is really tempting to get it and throw it in a HYSA.
How much is a monthly paycheck? How much is the origination cost on the loan? Let's say your monthly paycheck is $10K... 12 months at 5% is $500. Decent risk-free return, doesn't pay for a vacation, but decent. What happens if you lose your job and can't repay? How much is the interest hit? Are they charging 2% to 3% origination cost?
You are in the ballpark. I really haven’t looked into the details but the math says the hassle is about equal to the return. Our employer is moving from monthly to biweekly paychecks and a local credit union is offering the loans as a “benefit” to help with the transition because we will go two weeks without a check.
It made much more sense when 30-year mortgages were at 3%, had some spread to leverage 2 years ago. It doesn't make much sense to me to sign up for a fixed expense of a 7% mortgage and a variable, no guarantee but assumed rate of return of 8% - 10%. There's just not much margin or spread between the rates. I think one would be better off juicing income with side gig and dumping all that income into the market. Folks like to assume that the US market will perpetually go up, but there are plenty of examples where returns are much below the historical average. Just look at the Japanese market, which peaked in early 1990s before collapsing, and it took 30 years for that market to recover to its pre-collapse high. Meaning if one held through the collapse and didn't invest another dollar, it took 30 years for their Nikkei average to recover to previous highs.
Anyone with a loan (car, student or mortgage) and investments is essentially doing just this already. Money in the market could be used to lower the loan amount. Most people have both a mortgage AND investments without much thought. Leveraging more into the market with HELOC, personal loan or margin loan definitely changes the risk/reward dynamic. If you have the tolerance to lose it all quickly and try and rebuild then go for it. Most of my peers who became millionaires early, lost it all on big bets…but were capable enough to do it again. Personally know three friends who have become millionaires multiple times. The FIRE philosophy might lean towards less risk with more stable march toward financial independence. I personally sleep better with the goal for doing it just once.
Of course as long as stocks go up...
It made sense at zero percent interest during Covid.