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I have never heard Dave Donhoff say that one ought to mortgage one's home to invest in the stock market. I have heard him encourage taking the difference in the monthly payment between a 5/2/5 ARM and a 30 year FRM and investing THAT in the stock market, the profits from which could be used later to pay down the mortgage--or not.

Funny you should say that...

Before I bought my house, I had to decide what type of mortgage I wanted (actually mortgages, since I got a first and a second, and yes, I ran the numbers to determine if I was better off overall with a second mortgage or PMI). Without going into too much detail, I'll say that eventually I was deciding between a 30 yr FRM and a 5/1 ARM (2/2/5) tied to the 1 yr US treasury.

Anyway, I created a spreadsheet that simply compared the total costs of the 2, first under a "worst case" scenario (5/1 ARM going up each year to cap), then under a couple of scenarios reflecting historical interest rates. These sheets initially did not apply a rate of return to money saved under the 5/1 ARM (that is, if the ARM was \$50/month less, that money just sat there as if it was in a piggy bank or under the mattress). After determining the "break even" point for those scenarios, I then re-ran them using 4% and 8% rates of return on the excess funds.

After doing these calcs, the "break even" point was somewhere between about 6 years (for "worst-case, 0%" to about 12 years for "optimistic case, 8%"). The break-even was about 7.5-8.5 years for the scenarios I felt were most likely going forward.

So I got a 5/1 ARM for my first mortgage. My second mortgage was fixed, because the variable rate option had some much shorter break-evens under historically probable scenarios.

Having said that, I've also had a little "excess cash" that I've had to decide how to allocate. For now, "savings" is the primary place, with paying down the second mortgage running a bit behond that. Why? You guessed it, the "rate of return" on paying down the second mortgage is pretty low. Also, putting all my money into my mortgage means that I am essentially "investing" all my money in just one asset. One not very liquid asset, at that.

-synchronicity

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