Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 3
I am sure I can get more than 7% from stocks during the next 30 years,

How exactly do you intend on doing this? Details, please. Seriously. I'm always looking for good investment strategies.

The big difference between the mortgage interest rate and the market return is that the former is simple, and the second is compounding.

I think you misunderstand this a bit. The mortgage requires monthly servicing - monthly payments. You need a stream of cash flows to make the monthly payments. And if you happen to have a mortgage with negative amortization, the unpaid interest will indeed compound.

If you're comparing using mortgage proceeds and investing them to having neither, you need to account for the monthly debt service. That debt service needs to come from the investment returns. Hence, the compounding of investment returns is greatly reduced.

Alternatively, you can add money into the equation each month to make the mortgage payment. To keep things comparable, you would need to account for an additional monthly investment in your alternative (no mortgage) situation.

When returns are kept constant, you are correct that even a thin margin between the mortgage rate and the investment return is worth exploiting. But in the real world investment returns are not constant. An extended period of low investment returns, especially at the beginning, can keep things upside down for a very long time. In the end, it may come out ahead, but you are running a significant risk that something in you life will change and you need to access the funds before your plan has run it's course. A plan that is upside down for 25 years of a 30 year time frame is quite risky in my book.

--Peter
Print the post  

Announcements

Disclaimer:
In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.