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Subject:  Re: Do you have a rational home equity policy? Date:  1/27/2005  11:23 AM
Author:  yobria Number:  44219 of 94961

OldOne wrote:

Scott Burns discusses this issue here:

Thanks for the link and thoughts. Scott's article provides a good starting point for this analysis, though I thought his bit about a 12% return from home equity is misleading. You get that 12% whether you have 1% home equity or 100%. The return from paying down the mortgage is mortgage rate, no more and no less. His table at the bottom also assumes an artificially hight 7.5% mortgage rate.

He makes a couple of good points though:

The only way to get the higher return is to commit to producing enough income to make the mortgage payments, a commitment most people want to avoid as they approach retirement

Right, I think we all agree you want your mortgage paid off by the time you retire, when much of your investments will be in low returning fixed income assets anyway.

Now imagine that you have choices most people don't have: You have a stock portfolio equal to the purchase price of a house

That's true, most people have constraints that make my question a non-issue: They can't increase home equity b/c they don't have taxable investments. Or they can't decrease it since their payments would be too high to qualify for the loan.

But let's say you're young and you do have the taxable wealth. You're 30, a good investor, you have $100K in a taxable account, $100K in home equity, and a $100K 5% mortgage. Should you pull out the home equity and invest it? Historical returns say you should. I guess it's a matter of personal taste.


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