No. of Recommendations: 4
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.


Print the post  


Useful Resources
Our Home Center has all you need to make buying and owning a home a great experience. Get or refinance a mortgage and much more!
Buying/Selling a Home FAQ

Mortgage Professor
Offsite resource for mortgage questions.
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.