Mortgage vs. investments
Question: The consensus amongst the number crunchers in this group is that it is more profitable to put money into investments than to pay off a mortgage. So here’s a question for you all. Can anyone recommend an investment sufficiently secure and profitable that it would be smart for us to take out a home equity loan (we payed for the mansion outright) and put our money into it?
Answer: Consider a person who purchases a house with a mortgage. A wise thing to do would be to have several months worth of payments in an interest bearing account. After he accumulates additional funds the borrower must consider the risk of unemployment vs the risk of loss of leaving the money in an interest bearing account.
A dollar in an interest bearing account would have to earn the mortgage rate plus the amount paid in income taxes on that dollar’s interest plus the If you can’t pay off the mortgage, you have to look for a higher interest rate. Where is it? Equities. To your benefit: Dollar Cost Averaging. Five years later (you checked out Your Money or Your Life from the public library) you’ve socked away enough to pay for that mortgage. The problem now is that if you cash in your long term holdings, uncle sam will get his 33% cut of the profits. Solution: keep paying the mortgage out of income. That is why people have investment portfolios larger that their mortgages. Their risk is still twofold. If they end up unemployed, they will keep the house, but be forced to pay more in taxes. They also risk the market taking a big downturn (DOW 8000!). These events could occur together with the result of a foreclosure. If you paid cash for your house, and cannot eliminate the risk of a market downturn (like having an equal amount already invested in the market) it would not be wise to borrow money against your house and toss it to the street. Why? The day that Internation Fidget buys your employer and announces the move to one foot over the mexican border will be the same day that they announce that Bill Gates has lost 247 million before lunch. KEEP THE HOUSE, I MAY NEED A PLACE TO STAY!!! You did not mention an income stream. IT WOULD BE A REALLY BAD IDEA TO BORROW MONEY AND USE SYSTEMATIC WITHDRAWLS FROM AN INVESTMENT TO PAY OFF THE LOAN. (It is the reverse of dollar cost averaging) If you do have an income stream dollar cost average into the market. Congratulations on being such a defensive player in the money game. Offense is played the same way, one quarter at a time. Filed under: Home Equity LoanRelated Posts
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