I'm sorry if this has already been discussed or if I'm posting this in the wrong area, I'm new to this.

I'm 44 years old.

I own a house worth $280,000.

I owe $60,000 on the home, 7 years remaining on a 15 year, 4.75% loan.

What I'm wondering is if I should refinance another 15 year loan and get a low rate (around 3%) and take some money and invest it in the stock market. I'd get the mortgage interest tax deduction, and it seems to me as though the market will do much better than 3% over the next 15 years.

Is this a common question or practice? Are there rules of thumb regarding such things?

Thanks,
Mike

What I'm wondering is if I should refinance another 15 year loan and get a low rate (around 3%)

You would be more than doubling your time to payoff, until you are 59, rather than when you are 51. Did you have plans to pay off the loan when you were 51 for a particular reason?

If you take cash out, you may not get the 3% rate, or you may have to pay more in points in order to get the 3% rate.

Another option for you might be to just refinance the $60k into a 3% 10 year loan, dropping your P&I payments to about $580. This would only add 3 years onto your loan payoff time, and it would still allow you to invest the difference between your current P&I payment and the $580.

I'd get the mortgage interest tax deduction

You are only allowed to use the mortgage interest deduction on the first $100k of non-acquisition debt. In your case, that would mean with $160k borrowed at a 3% rate, your deduction would be no more than $4800 annually. Depending on your filing status and other deductions, you may still be better off taking the standard deduction.

it seems to me as though the market will do much better than 3% over the next 15 years.

You might want to take a look at the S&P 500 performance from 1959 - 1974 to check your assumptions on what a market can do in a 15 year period.

All of that said, it can be a good idea, if you have a good record at investing, and a plan for consistently earning more than 3%. If you are a beginning investor, I would recommend doing a lot more studying before you dump a large amount of money into the market.

AJ

Ditto AJ's response.

The only way your idea will work is if you take a disciplined approach to investing, asset allocate, periodically rebalanced and keep all dollars fully invested over the period you'd otherwise be a homeowner. Remember, your equity sits in your house like money in a long term CD. Many will hold this and use it to pay for their retirement condo. Others may keep it to pay for any future long term care while others may keep it as a legacy for their grandchildren. By pulling it out and putting it into the stock market, you are putting it at market risk and default risk (the risk that something would happen to you such that you wouldn't be able to pay it back)

But as mentioned, done correctly, this is not necessarily a bad idea.

BruceM

Not a bad plan, but there are things you have not yet told us.

How much money are you making?

What are your expenses? Putting 8 kids through college? Supporting your aging mother?

How much money do you have in the market now, and what is your market experience?

What do you mean by "the market"? Are you just going to dump some money there and keep it there without further analysis? That would be really dumb. You need a timing and trading strategy. People who paid attention have been in cash recently, and are now beginning to put money back in cautiously. All your holdings need to be analyzed regularly, and you need to look for new things as well. Try reading stuff in the Mechanical Investing area to get some ideas.

I'm going to buck the trend and say this is an incredibly BAD idea - unless you have been investing for the last decade or so and have proven that you know what you're doing in investing.

Despite all of the advice and information available on the internet, when you start out investing, you're going to make mistakes and lose money. It is better to make those mistakes with the relatively small amounts you have available when you start out by investing what you can save from your wages on a monthly basis.

How would you feel if you pulled $100k of equity out of your house and started investing, only to find that in 6 months the investment account was down to $50k? How about $35k?

There's no need to be in a rush. There are always opportunities to make money investing - in both good times and in bad. You just have to learn what works for you and what lets you sleep at night.

--Peter

I think this is an incredibly bad, bad, bad idea. Don't borrow money that you can so easily lose, in particular when that money is the equity in your personal residence.

Don't confuse home ownership with investing. A home you and your family live in. Its not an investment to flip or sell in the future. Its not a bank.

When the mortgage is paid, all you have to worry about is taxes and upkeep. You can't lose it otherwise. You can sleep at night.

Think of the worst case scenario. You take out money or refinance. You then lose your job or get disabled. Then you find out your investments have lost 50%. Will you be able to make the mortgage now? If the house was paid for, you wouldn't be quit as worried.

JLC

I also think it's a bad idea. If you have any extra money monthly and plan to live in the house for a long time I would make a principal payment to the mortgage so you could get it paid off sooner.

It'll be like making 4.75% return on that extra money until it's paid off and then you'll have all of that mortgage payment to invest.

It is a great feeling to have a mortgage finally paid off.

In my extensive research, I've determined that 100% of all foreclosures occur on houses with a mortgage.

I think it's best to aggressively pay off your house and then put your monthly payment towards investing.

It may not be the mathematically best approach, but on a risk adjusted basis, it's better. Paying off your house is a guaranteed 4.75% return - you can't get that high of a return on any guaranteed investment.

D.

In my extensive research, I've determined that 100% of all foreclosures occur on houses with a mortgage.

Well, your research wasn't quite extensive enough. Foreclosures also occur on houses without mortgages that have HOA fee obligations or property tax obligations.

AJ

If the closing costs in relation to interest reduction are reasonable one option is to re-finance for the current amount of the loan, keep the same payment amount and thereby have the mortgage paid off sooner. Do not borrow to invest in the "market". If professional investment managers can not consistently beat the market neither will you.

There are a few risks and costs to doing this that might not be obvious.

1) You might need or want to move sometime in the next 15 years which could change all the numbers if you had to get a higher interest rate mortgage to buy your next house.

2) Your higher and longer monthly payment might be harder to make if there is a career setback, disability, divorce, etc.

3) You might have to sell your investments at a bad time to make ends. If you put the money into a retirement account to get additional tax advantages then it could be very expensive to get it before your normal retirement age.

4) You would be lengthening the time that time that you are paying interest on you current $60K balance years which could add tens of thousands of dollars in interest if you consider the first dollar (your current loan) borrowed as being the last dollar paid off.

With that said and the question of taking money out in a refinance is only slightly different than if you were buying the house today and had a lot of money in the bank and deciding large a mortgage should you get. There is not an easy answer for this.

The big question is to consider the rest of your situation and decide to if you really NEED to take the extra risk if using the mortgage to leverage your investments. I don't know the real odds but if there is a 5% chance that taking out the mortgage will turn out horribly bad, then you may not have the need to take that additional risk.

Doing full cash out finance might cost a couple of thousand dollars ($2,000?). I would take a look at saving that money and doing a no cost refinance at a credit union that would allow you to pay off the loan quicker. For the amount you need your local credit union might have some low cost low interest rate home equity loans that you could use. Here is what Penfed has;
https://www.penfed.org/productsAndRates/mortgages/homeEquity...

Lots of good comments here. But plenty of bad ones, too.

Here's mine:

* Your house is not an investment. You don't "earn" 4.75% (or whatever your interest rate is) by paying extra on the mortgage. Such claims are sheer innumeracy. Avoiding an expense is not the same thing as earning a profit.

* A paid-off house is not cost-free. You have an imputed (foregone) cost of whatever that amount of money would be earning if it was invested. In my case, I have a good chunk of money invested in a preferred stock portfolio yielding about 7.5%. $100,000 in this earns $7500 a year. Putting that $100K on the mortgage would cost $7500 a year in forgone income.

* If you are a novice newbie investor, you will probably make a LOT of mistakes and lose a good chunk of money while gaining experience.

* If you are going to pull money out of your house to invest, you should get the cheapest money you can for the longest time you can. This means a 30 yr mortgage, not a 15 year. And fixed, not adjustable. And 80% LTV. If you are going to do it, do it right, don't take half-measures.

* Oh yes, don't pay points to get a lower rate. If you don't understand why, then your financial knowledge is lacking.

* You MUST protect yourself financially. Unless you are an experienced investor, you should take something like half the money you pull out, or something like 4-5 years worth of payments, and put that into something reasonably safe & liquid. Perhaps bond funds like BND, IEF, SHY, etc.
Invest with the remaining money.

* As long as you protect yourself, this isn't a bad idea, IMHO. This is pretty much the way that I got started on my investing career.

Here's mine:

1. Do you have an E-fund of at least 6 months living expenses beyond what you're planning to invest? Maybe even a year's worth?

2. Do you have any credit card debt, or other debt at all that costs more than 3%?

3. Do you have a plan for how to cover medical costs should you become unemployed?

4. Do you have a plan for getting a new job should you become unemployed?

5. Do you have a well-thought-out portfolio of large/small/dividend paying stocks or are you picking mutual funds? Or are you following some stock Uncle Floyd or the Fool (same thing) touted last week?

6. Are there any other people who depend on your income for a living? Would anyone other than you be homeless if this fell though?

7. Are you going to dump it all into the market at once or dollar-cost average it in?

Since you claim you can get a 3% morgage, and since there will be mutual fund fees and/or closing costs you're starting out 4% in the hole. You're going to have to generate 7-8% returns just to make the risk worth while. Then there's taxes. Even at 7-8%, since you're starting 4% in the hole, your gain on $50K is a measly $2,000 a year. Minus taxes. Best case scenario. Worst case you're in the red. Just get a job playing Santa or driving UPS for the holidays and you could pull that in without the risk.

If we can assume you're a great money manager you should already have an extra $500 a month you could invest and just dollar-cost-average it in without using money you have to PAY INTEREST on. If you don't have an extra $500 a month, you can't afford to do this anyway. Everyone I've ever seen try a get-rich-quick idea, tried to be BMOC (big man on campus) with some hairbrained idea he could brag about, ended up get-poor-quick. Obviously, I'm in the just-say-no camp on this. I don't invest borrowed money (other than real estate). I don't invest money needed to pay the bills.

YMMV.

SG

Putting that $100K on the mortgage would cost $7500 a year in forgone income.

The net isn't $7500.

PSU

Thanks for all of the replies. I appreciate the thoughtful input.
I'm still not quite sure what to do, solid advice on both sides of the argument. My hope was that there'd be some common rule regarding this situation.

I typically can't stand debt. So I've paid off all of my loans early and have been paying off the home loan a bit early as well. It makes me feel more secure knowing that I won't have those mandatory expenses going forward.

But recently I've been wondering if that's the most logical thing to do. If I have some debt but have enough money set aside for emergencies then maybe it makes more sense to invest some money rather than paying down the debt.

Also, the more I think about it the refinancing part is a red herring. Really the question should be, are you better off with low interest, tax deductible debt and money to invest, or are you better off paying off the debt first and then investing money once that's paid off.

I'm just not sure yet.

My hope was that there'd be some common rule regarding this situation.
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Really the question should be, are you better off with low interest, tax deductible debt and money to invest, or are you better off paying off the debt first and then investing money once that's paid off.

I'm just not sure yet.

A lot of it depends on your comfort with risk, and what you perceive to be the greater risk. Are you comfortable with increasing the leverage on your home in order to invest? Technically, any investing you do while still having a mortgage on your home is 'leveraged', so it's the level of leverage you need to determine you are comfortable with. All of these are qustions that you need to decide for yourself, so 'common rules' don't apply.

AJ

Paying off short-term consumer debt is good, because it is so costly, *and* you can eliminate the debt quickly.

But there are good reasons to not pay extra on a mortgage. It only lowers your balance, but doesn't change your required payment. You don't see any concrete benefit until decades later, when the mortgage finally gets completely paid off.

If your monthly payment is $2000 and you pay, say, $50,000 in extra principal and then a couple of years later run into financial trouble, they won't let you skip 10 payments by counting $10K of the $50K as "early" payments. They'll foreclose, take the house AND keep your $50K.

There are only 2 states of a mortgage:
1) Paid off (i.e., no mortgage)
2) Balance outstanding (i.e., a live mortgage)

People like to pretend that there is a 3rd state of "paid down more than contractually required" -- but there isn't.

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the question should be, are you better off with low interest, tax deductible debt and money to invest
Actually, the right question is "...low interest, non-callable, low payment, fixed payment debt, and money to invest..."

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are you better off paying off the debt first and then investing money once that's paid off
Ignoring the effects of compounded earnings and inflation is financial malpractice.
The investments presumably grow and compound for 30 years.
Inflation means that you are paying off the mortgage with cheaper and cheaper dollars as time goes by. The final payments are made with the cheapest dollars---and those are *just* the payments that you eliminate when you make extra (early) principal payments. Pay with expensive dollars now so that you can avoid cheap payments in 25 years---what's the sense in that?

Technically, any investing you do while still having a mortgage on your home is 'leveraged', so it's the level of leverage you need to determine you are comfortable with

I think that the accurate way to look at it is to look at your entire financial picture, rather than the pieces in isolation. (In fact, this is just what Dave keep harping on.)

For example,if you have a $500K house with a $495K mortgage, are you highly and/or dangerously leveraged? Maybe, maybe not.
If your liquid net worth varies according to how full you car gas tank is, then yes.

OTOH, if you also have $300K in CDs, $300K in bonds, and $400K in stocks, the house-only leverage is inconsequential.

And if the house mortgage is costing you 4% and the net earnings of the investments is 8%, then that $495K mortgage is financially astute.

I typically can't stand debt. So I've paid off all of my loans early and have been paying off the home loan a bit early as well. It makes me feel more secure knowing that I won't have those mandatory expenses going forward.

But recently I've been wondering if that's the most logical thing to do. If I have some debt but have enough money set aside for emergencies then maybe it makes more sense to invest some money rather than paying down the debt.



i'm a bit believer in the 'sleep test' for financial decisions : how well will you sleep if you do A instead of B ..

imo, overrides numbers, overrides logic.


=

1. Do you have an E-fund of at least 6 months living expenses beyond what you're planning to invest? Maybe even a year's worth?
- Of course, everyone should have that regardless.

2. Do you have any credit card debt, or other debt at all that costs more than 3%?
- Of course not. Who would consider investing extra cash before paying off credit cards?

3. Do you have a plan for how to cover medical costs should you become unemployed?
- We pay for our own insurance, a high deductable HSA plan. Not sure this is relavent though. Doesn't everyone with a mortgage have to consider this?

4. Do you have a plan for getting a new job should you become unemployed?
- I was unemployed this year, got another job after 3 months. My field is pretty secure.

5. Do you have a well-thought-out portfolio of large/small/dividend paying stocks or are you picking mutual funds? Or are you following some stock Uncle Floyd or the Fool (same thing) touted last week?
- Of course, wouldn't consider investing if not.

6. Are there any other people who depend on your income for a living? Would anyone other than you be homeless if this fell though?
- I have four children. I suppose I could put all my money in cash to make sure nothing bad ever happens. But it would be nice to be able to retire with some money instead, and maybe leave them something.

7. Are you going to dump it all into the market at once or dollar-cost average it in?
- Are you serious? Who doesn't dollar-cost average?

Since you claim you can get a 3% morgage, and since there will be mutual fund fees and/or closing costs you're starting out 4% in the hole. You're going to have to generate 7-8% returns just to make the risk worth while. Then there's taxes. Even at 7-8%, since you're starting 4% in the hole, your gain on $50K is a measly $2,000 a year. Minus taxes. Best case scenario. Worst case you're in the red. Just get a job playing Santa or driving UPS for the holidays and you could pull that in without the risk.
- Valid points. I'm not sure your math is solid, but I am trying to figure out whether or not the risk is worth the reward.

If we can assume you're a great money manager you should already have an extra $500 a month you could invest and just dollar-cost-average it in without using money you have to PAY INTEREST on. If you don't have an extra $500 a month, you can't afford to do this anyway.
- That makes no sense. The question is whether or not it makes more sense to have a low interest, tax deductable loan and invest wisely with the money or to pay off the loan and invest with less.

Everyone I've ever seen try a get-rich-quick idea, tried to be BMOC (big man on campus) with some hairbrained idea he could brag about, ended up get-poor-quick. Obviously, I'm in the just-say-no camp on this. I don't invest borrowed money (other than real estate). I don't invest money needed to pay the bills.
- How is this a get rich quick scheme? Investing wisely over the long haul won't get me rich quick. Just hopefully would set me up for a better retirement.

All that said, I'm still undecided :)