Refinancing Home to Invest

[no_thanks]

Sorry if there is already a thread on this.  I did a quick search and didn't see anything. 

 

Looking at the spread between AT&T or something like that, and 15yr fixed rate mortgages, do you think it would be worthwhile to take out a mortgage on a fully paid off house that has a pretty solid, stable value, and just sticking the money in AT&T.  Would a bank let you do this, if it was for like 20% of the houses value? 

 

Thanks a lot.

 

P.S. This is probably the market top sign everyone is looking for :) 

[matts]

 

P.S. This is probably the market top sign everyone is looking for :) 

 

Definitely sounds like it.

 

And why pick AT&T?

[no_thanks]

Just don't really see there dividend going down any.  I imagine in something like this you are just really looking for stability. 

[Lance]

no_thanks, if I was going to do this I'd probably look at a 30yr fixed rate mortgage.  I don't think AT&T is a bad choice, but I'd feel a bit more comfortable with Altria.  I suppose if I was looking to amp it up a bit I'd consider something like UTG - maybe 1/4 in each of MO and T and 1/2 in UTG. 

 

Thanks,

Lance

[Crip1]

no_thanks:

 

It depends to some extent on what state you are in but, yes, you can definitely do this provided that you have income/credit/etc to satisfy underwriting guidelines. Getting a loan these days is a pain, but it is doable to be sure. When I refinanced our house a couple of years back at 2.875% I thought about taking an additional $50K - $100K out and putting it into JNJ which, at that time, was yielding over 3%. The issue into which I ran was that once I went to a higher Loan to Value, my rate went up which mitigated the yield difference. So, the concept to me makes a helluva lot of sense. No comment on AT&T but there may be other companies out there whose yield is smaller but are more likely to increase it, or you may want to split your monies into 2-3 different companies. I'll leave that selection to you.

 

When you do this, check on a few different loan amounts (50%, 60%, 70% and 80%) as well as different terms (30 year, 20 year, 15 year, etc) to see where you can get the best rate.

 

-Crip

 

P. S. - OK, I have to do it. I work for a mortgage lender so this is a shameless bit of marketing, but, depending on what state you live in, we may be able to help you. I am not a loan officer, but I have a great group of folks who can run some scenarios for you to see what may work best. Send a private message if interested.

 

P. P. S. - I feel like I am soiling the sanctity of the board by shamelessly soliciting business...I figured that capitalism outranked the sanctity.

[adesigar]

Sorry if there is already a thread on this.  I did a quick search and didn't see anything. 

 

Looking at the spread between AT&T or something like that, and 15yr fixed rate mortgages, do you think it would be worthwhile to take out a mortgage on a fully paid off house that has a pretty solid, stable value, and just sticking the money in AT&T.  Would a bank let you do this, if it was for like 20% of the houses value? 

 

Thanks a lot.

 

P.S. This is probably the market top sign everyone is looking for :)

 

Do you need the money? Are you just bored and need something to do?

Since you are thinking of a 15 year loan and think that AT&T is really stable could you look up the Price of AT&T 15 years ago?

I believe in the “Don’t risk money you have and need for money you don’t have and don’t need.”

 

 

 

[tiddman]

Borrowing against your house to invest in stocks is generally a really bad idea.  It puts something that you really need (your house) at risk.  If your house is already paid off you have a pretty high degree of financial stability that you'd be giving up.  Doing this and picking one stock, any one stock, is especially risky, if the stock underperforms, tanks, or goes to zero, you could lose your house.

 

You might compare getting a mortgage, using the proceeds for investment, and making payments on the mortgage to simply investing the same monthly amount into the same investment.  That is, rather than taking out a $200k loan on your house, investing it, and paying $1400k/mo for 15 years, instead just invest $1400k/mo.  The 2nd approach probably carries less risk and dollar cost averaging into a stock index has been suggested by some old guy in Omaha as a good no-brainer way of investing.

[no_thanks]

Thanks for all the feedback.  I won't be doing this.  I do think it is a good idea to try and come up with ideas to increase your productive assets, and was curious if anyone had used this method before.  Long term fixed rate debt just seems so attractive to me right now, and I can't think of another way to get access to it. 

 

Anyway, thanks again for the responses.  I am not the best at seeing things from multiple angles, and the back and forth is much appreciated. 

[enoch01]

Another option is to take the money out and just sit on it.  Maybe you will get better prices in the future.  Is Mr. Market #1 offering you cheap cash for your residence today?  Will Mr. Market #2 offer you great prices on securities in the future?  Remember you don't have to make both transactions simultaneously.  Long-term, non-callable leverage can be valuable.

[DTEJD1997]

I probably would not do this...

 

I most DEFINITELY would not pile it all into one single stock.

 

With that being said, If you can borrow against the house at 3% and deduct the interest, I think you could DEFINITELY make a higher return than that in dividend paying stocks.

 

Is it worth the risk to pick up 2% or so?  I doubt it...especially if you are married.

 

Try explaining to your wife that you are borrowing against the house to get extra income.

 

Of course, if I were doing it, I would be tempted to get the 20% dividend on Awilco drilling and a basket of others.  Borrow money at 3%, get 10% + maybe capital appreciation...tempting for sure.

[Hielko]

The easiest option seems to me to rent a home instead of buying. That way you don't have any capital locked up in bricks.

[bz1516]

Or you could go to interactive Brokers, open a portfolio margin account, borrow money for 1.5% and leverage your money 7x.  Then you could buy a bunch of stable high yielding MLPs like EPD etc.

[no_thanks]

Or you could go to interactive Brokers, open a portfolio margin account, borrow money for 1.5% and leverage your money 7x.  Then you could buy a bunch of stable high yielding MLPs like EPD etc.

 

Wow, they really only charge 1.5%.  That can't be fixed right?  What type of warning do they give for raising it.  I think the main attraction to the house idea is the long term fixed aspect of it, with inflation hopefully doing its thing at some point over the next 15 to 30 years. 

 

With the market at new highs, this is obviously not the time to take out a ton of leverage.  It is just that one side (the debt) seems like a really great deal, while the other (equities) seem pretty expensive.  I just want to make sure that, as I am kinda young and will see a stock market crash in the future, I am ready to capitalize on it. 

 

Thanks again for all the feedback. 

[Guest longinvestor]

This is a very interesting thread for me, one I've thought about a lot. I think it is a very worthwhile idea (wife's approval, emotional attachment etc aside) from a financial side.

 

My own situation:

 

Owned homes since 1990. Keeping math simple, I've paid about $500,000 towards the mortgage (P+I); Without going into complicated calculations, I'll subtract $100000 for the benefit of MI deductions and add back $100000 in home improvements. Property taxes over the 24 years estimated at $130000. What do I have to show for all this? The home equity we own today stands at a whopping $70000 after 24 years of home ownership. "I've made lots of payments" about sums it up. My investment in the homes we've owned has been an unmitigated disaster. Yeah, yeah I know there are the joys of home ownership, fixing leaks, shoveling etc. Financially??

 

I'm a big believer in putting it all into one stock, like Berkshire and I don't need a calculator to tell me that I would been far, far better off putting the down payment on my first home of $20000 into BRK. I like to look at the down payment as permanent capital and don't believe in dividends.

 

Renting would have been a great alternative. 

 

 

[tiddman]

Owned homes since 1990. Keeping math simple, I've paid about $500,000 towards the mortgage (P+I); Without going into complicated calculations, I'll subtract $100000 for the benefit of MI deductions and add back $100000 in home improvements. Property taxes over the 24 years estimated at $130000. What do I have to show for all this? The home equity we own today stands at a whopping $70000 after 24 years of home ownership. "I've made lots of payments" about sums it up. My investment in the homes we've owned has been an unmitigated disaster. Yeah, yeah I know there are the joys of home ownership, fixing leaks, shoveling etc. Financially??

 

A back of the napkin analysis, if you bought a $400k house in 1990, put 20% down ($80k) and financed the rest at 5%, after 24 years you should have paid about $500k in P&I, of which $217k went to principal, so you should have $217k + 80k = $297k in equity?

 

I'm a big believer in putting it all into one stock, like Berkshire and I don't need a calculator to tell me that I would been far, far better off putting the down payment on my first home of $20000 into BRK. I like to look at the down payment as permanent capital and don't believe in dividends.

 

Well compared to investing in Berkshire in 1990 almost every financial decision looks dumb so I wouldn't beat yourself up too much.

 

My mother inherited some 40-year savings bonds sometime in the early 60's.  An avid saver and very risk averse she hung onto the bonds until they expired and then for a few more years.  So her $5000 or whatever of principal was safe and sound, plus her 4% or whatever non-compounding interest every year (about $8000 over the life of the bond).

 

That same $5000 invested in the S&P in 1960 would be worth $171k today.  Invested in KO it would be $769k. But of course investing it in thousands of other possible investments could have made it zero.  So the bonds were either a terrible or great idea depending on how you look at it.

[Guest longinvestor]

Owned homes since 1990. Keeping math simple, I've paid about $500,000 towards the mortgage (P+I); Without going into complicated calculations, I'll subtract $100000 for the benefit of MI deductions and add back $100000 in home improvements. Property taxes over the 24 years estimated at $130000. What do I have to show for all this? The home equity we own today stands at a whopping $70000 after 24 years of home ownership. "I've made lots of payments" about sums it up. My investment in the homes we've owned has been an unmitigated disaster. Yeah, yeah I know there are the joys of home ownership, fixing leaks, shoveling etc. Financially??

 

A back of the napkin analysis, if you bought a $400k house in 1990, put 20% down ($80k) and financed the rest at 5%, after 24 years you should have paid about $500k in P&I, of which $217k went to principal, so you should have $217k + 80k = $297k in equity?

 

I'm a big believer in putting it all into one stock, like Berkshire and I don't need a calculator to tell me that I would been far, far better off putting the down payment on my first home of $20000 into BRK. I like to look at the down payment as permanent capital and don't believe in dividends.

 

Well compared to investing in Berkshire in 1990 almost every financial decision looks dumb so I wouldn't beat yourself up too much.

 

My mother inherited some 40-year savings bonds sometime in the early 60's.  An avid saver and very risk averse she hung onto the bonds until they expired and then for a few more years.  So her $5000 or whatever of principal was safe and sound, plus her 4% or whatever non-compounding interest every year (about $8000 over the life of the bond).

 

That same $5000 invested in the S&P in 1960 would be worth $171k today.  Invested in KO it would be $769k. But of course investing it in thousands of other possible investments could have made it zero.  So the bonds were either a terrible or great idea depending on how you look at it.

 

First home $110,000 owned for 8 years; very little equity built up

Second home $240000, owned for 1 year; lost my shirt on home value and brokerage fees

Third Home$ 340,000 owning for 13 years; Home worth half of that.

 

When people talk about the RE bubble, I caught the worst of it. I was the bubble, buying and selling at the exact wrong times, but that was how it worked out. This home ownership experience in part made me a believer in BRK as an investment, I have owned BRK since 2005 and 80% of my retirement portfolio in it. I expect to laugh off the home equity disaster some day in the future. I plan to advise my kids, both in HS, to postpone the home ownership idea until it becomes a must do for them.

 

[rkbabang]

 

First home $110,000 owned for 8 years; very little equity built up

Second home $240000, owned for 1 year; lost my shirt on home value and brokerage fees

Third Home$ 340,000 owning for 13 years; Home worth half of that.

 

When people talk about the RE bubble, I caught the worst of it. I was the bubble, buying and selling at the exact wrong times, but that was how it worked out. This home ownership experience in part made me a believer in BRK as an investment, I have owned BRK since 2005 and 80% of my retirement portfolio in it. I expect to laugh off the home equity disaster some day in the future. I plan to advise my kids, both in HS, to postpone the home ownership idea until it becomes a must do for them.

 

 

Not everyone has had such a bad experience buying and selling homes.  Your post inspired me to do my own back of the envelope calculations and I didn't do so bad.  I've owned 3 homes over the last 18 years (not quite as long as you yet) and I calculate that if you total up everything I've spent (down-payment, P&I payments, taxes, insurance, and home improvements) I'm out about $608K out of my pocket and I have about $210K of equity in my current home.  So call it $400K I'm out.  $400K/18 years is $22.2K/year which is about $1850/month.  I suppose I could have rented for $1850/month, but certainly not very nice places and 18 years ago I wouldn't have been able to afford $1800/month.  I just looked up rentals in the town I live in and to rent a house with half the square footage of my current home it would cost $3500/month.  That is with no utilities included.  That is much higher than the cost of my mortgage + taxes and insurance for less than half the house.  Buying a home can be a bad deal, but it doesn't have to be.  Like anything else, you can't overpay.  This is most important on your first home, because if you are selling a home in an inflated market and putting the proceeds into another home in an inflated market it is a wash (as long as you are not upgrading too much).  But when buying your first home that doesn't apply, so you need to be careful.  I worked with a guy who moved to my area in 2005, rented for years, and finally bought a home sometime after the crash in 2010 (IIRC).  He did very well.

 

[SharperDingaan]

This is usually a really bad idea ...

 

You own because it is cheaper than renting; home ownership costs don't change anything. You simply pay them to the landlord or pay them to the bank/insurer/municipality/DIY store. If I am your landlord you will also pay me a profit, & I am not going to give you back any tax rebates (US interest deductibility) or loan principal reduction.

 

Home ownership is pushed on the young because it is largely idiot proof. Apply 25 yrs of inflation to the house asset, & mortgage liability, & the difference is equity that you will live off in retirement. In Canada you will also have no mortgage, & the benefit of 25 yrs of forced saving. The underlying cause of most boomer wealth.

 

The exception is owning your home via a standard sale and lease back. ie: your portfolio sells its assets for cash, uses the cash to buy your house, rents it back to you, then mortgages the house to recover some of its cash,  which it then reinvests. The portfolio has deductible interest costs covered by your rental payment, benefits from all future appreciation on the property, & you get cash.

 

SD

 

 

 

 

 

 

 

 

 

[rayfinkle]

Great thread.

 

I've tried to justify buying a house several times over the past few years, but after trying to fully load all the costs, fees, etc. I could never convince myself that the best reasonable case was more than a marginal step up the return on buying a stable REIT, for example, in a down market. My base case was likely a negative return vs. opportunity cost.

 

There are benefits though. The main one I think is that you are trading rent--a variable cost highly likely to escalate over time--for a mortgage that (depending on how you structure it) fixes the majority of your home ownership costs. This can be a powerful mental force when in points of life transition, etc.

 

But for me it came down to: anything you pay towards prin. returns you the mortgage rate (plus and minus).

 

 

 

[Cardboard]

I have a fixed rate Heloc on my home that I have used to invest. I could not accept the fact of having all that capital tied up in a nearly non appreciating asset. The result now is that the investments are worth over twice the loaned amount after only 2 1/2 years. If I get this up to 2.5 times the loan value, then the gain will cover the entire value of the home.

 

I don't think that there is any better way available to leverage for the common mortal. It is cheap because it is backed by the value of your home. There is no margin call. You also have the ability to repay a big portion each year if you want without penalties.

 

Like with all forms of leverage there is risk. I think that you need to assess your own financial situation and the potential risks under different scenarios. For example, if the value of my home had been my main asset, I would have been reluctant to enter into such a deal.

 

Regarding where to invest the proceeds, I see leverage as the ultimate form of dry powder. You only want to deploy this in the best forms of investments available. I won't hesitate at all to keep it all in cash if opportunities are scarce. Playing the spread game IMO is the best way to part you with your money. It is best left to the banks.

 

A friend of mine came to me with this idea recently. The amount loaned was several hundred thousands in order to make a "potential" spread of 4%. I simply said to him, what is that additional 4% going to change in your standard of living? The answer was nothing. So I told him to keep that "borrowing power" or "dry powder" for that great business opportunity that will materialize for sure some day. The chance to double or triple your money when blood is running in the streets. Unfortunately, he still succumbed to the pitch from that salesman. They always have some nice charts and tax advantages to put asleep the normally astute business people.

 

What a change from late 2008, 2009 and even 2010 when everyone was so careful about not losing a further dime.

 

Cardboard

[tiddman]

In my area (northern Virginia) the monthly cost of owning vs. renting is pretty similar.  If you buy a $500k house, the P&I might be around $2k plus $400 or so for escrows, and renting the same house would be the same $2400/mo.  The interest and property tax are deductible so you might be a little ahead as an owner each month, the obvious problem being the $100k down payment you have to come up with.

 

On a 30 year mortgage, the first payment is about 20-21% principal and the rest goes to interest and escrows, in this example that is about $525/mo you're essentially saving, though you won't realize it until you sell or refi.  5 years later this is 27%, 10 years later 34%, etc. as you go through the see-saw of the 30 year amortization schedule.  Around year 18 more than half of your monthly payment starts to go to principal and at this point the loan is more than half paid off, so if you can just sit tight in the house, without any appreciation you can build up lots of equity.  For many people we know this is basically their retirement plan, it is an expensive place to live and a lot of families don't have much savings besides their house equity, but if they just live in the house for 20-30 years they'll have something of value.

 

Putting $100k down and then after 20 years having $300k of equity is equivalent to about 6% CAGR which is not great, but really not bad, it is higher than the current risk-free rate and coincidentally almost exactly what the S&P has returned in the past 10 years.  However it is a complete no-brainer because all you have to do is buy a house that you can afford and live in it.

 

Of course if you got unlucky and bought during the bubble, those principal payments are just going towards trying to get above water and the formula changes and your 20 year picture might be break-even or worse.

 

Real estate in this area has appreciated at a long term average rate of about 4% for decades, and if you can hold for a market cycle or two then you can do really well.  Using the same example as above, after 20 years the house would be worth over $1M so you'd have more like $800k in equity -- $100k from your down payment, $200k from principal paid down, and $500k from appreciation, and now the equivalent CAGR on your down payment is closer to 12%.  This makes being a long-term renter a really dumb thing to do, but this is only true in markets where real estate appreciates, and if you didn't buy during a bubble.

[yadayada]

How about a small amount of margin in your IB account? Lets say you have 200k$, and you borrow like 60k$ or something? Nothing sexy, but how bad does it have to be for you to be margin called?

 

Probably not the best idea in the current market tho.

 

What would the rate be in a market correction? Is that 1.5 % fixed?

[adesigar]

Most people buy homes more as a place/community to live in and not as an investment. Sometimes you end up losing on the investment but it because you are paying to live in a low crime rate area, send your kids to great public schools, live near friends/family, close to the beach or a hub of activity and you don't have time to wait.

 

That said I drove my wife crazy looking at houses in our area for almost 2 years. We ended up buying our first home in Q3 of 2011, Refinanced Q4 2012. Now the Mortgage+HOA+Taxes+Insurance+Maintenance for our 1700+ Sqft house is less than the rent for a 1100 sqft apartment in my area. Home prices are up 35% since we bought it. Lady luck helped and so did Berkshire Hathaway. Used Berkshire Hathaway subsidiary Homeservices and it was an excellent experience.

[fareastwarriors]

Most people buy homes more as a place/community to live in and not as an investment. Sometimes you end up losing on the investment but it because you are paying to live in a low crime rate area, send your kids to great public schools, live near friends/family, close to the beach or a hub of activity and you don't have time to wait.

 

That said I drove my wife crazy looking at houses in our area for almost 2 years. We ended up buying our first home in Q3 of 2011, Refinanced Q4 2012. Now the Mortgage+HOA+Taxes+Insurance+Maintenance for our 1700+ Sqft house is less than the rent for a 1100 sqft apartment in my area. Home prices are up 35% since we bought it. Lady luck helped and so did Berkshire Hathaway. Used Berkshire Hathaway subsidiary Homeservices and it was an excellent experience.

 

 

+1.

 

Enjoy it.

[matts]

How about a small amount of margin in your IB account? Lets say you have 200k$, and you borrow like 60k$ or something? Nothing sexy, but how bad does it have to be for you to be margin called?

 

Probably not the best idea in the current market though.

 

What would the rate be in a market correction? Is that 1.5 % fixed?

 

Margin interest rates are typically floating, but can be fixed. Interactive Brokers uses Fed Funds Effective (Overnight Rate) as the benchmark rate.

 

https://www.interactivebrokers.com/en/index.php?f=interest&p=schedule2