4 ms·

I'm not sure I understand why you would pay rent to live somewhere else. I'm talking about living in the house that you bought and have a mortgage on. Say your

by turar 11y ago

I'm not sure I understand why you would pay rent to live somewhere else. I'm talking about living in the house that you bought and have a mortgage on. Say your mortgage loan amount is $300K at 3.5%, locked in for 30 years. Instead of paying it off in 6-10 years with extra payments, I say invest those extra payments in the stock market, and keep paying the mortgage for 30 years at a locked rate of 3.5%. If that money that you invested makes anything above 3.5% over 30 years, then that's free returns to you. On top of that, it also depends where you think the interests rates will be in 10-20 years from now. If you believe that they will be higher than they are currently, then that's even more reason to keep that loan locked in for 30 years instead of paying it off sooner. Hope that helps.

JackFr 11y ago
> On top of that, it also depends where you think the interests rates will be in 10-20 years from now. If you believe that they will be higher than they are currently, then that's even more reason to keep that loan locked in for 30 years instead of paying it off sooner. That makes no sense. You'll be better off paying a lower interest rate than you would be not having a loan in a high rate environment?
- turar 11y ago
  Remember, the loan is locked in. Everything around you may be a high rate environment, but your loan is still 3.5% when regular bank savings account would be paying, say 7%. So, if you bought shares of an Emerging Markets ETF [1] with the money that you would have otherwise paid for accelerated mortgage payments. Today these shares are paying you around 3.5% in dividends alone. Fast forward ten years to a high rate environment, and ten years of buying ETF shares and reinvesting dividends, I'm assuming that the dollar amount of your shares would be higher than the amount of debt you would have otherwise paid off already. That's why no other country on Earth that I know of has 30-year fixed mortgages. They are essentially a government subsidy to homeowners via Fannie/Freddie. [1] https://www.google.com/finance?q=NYSEARCA%3AVWO https://www.google.com/finance?q=NYSEARCA%3AVWO
  - ryandrake 11y ago
    You need to discount your calculations because your ETF is not risk free.
    - JackFr 11y ago
      In fairness the value of your home is not constant or risk free either.
  - JackFr 11y ago
    Point taken about the high rate environment -- I'm not sure where I thought that other money would go. But it's still not obvious that you would be better off under your plan. You're financing two assets, you home and your portfolio with some mixture of debt and equity. Without making assumptions about the expected return of the housing market, the return on your portfolio, the variance of those returns and the horizon, its not clear that you'd still be better off. You say take advantage of the cheap (tax-favored too) leverage -- I'd be concerned medium term variance in returns. That ETF you pointed to is down over the past 10 years and underperformed the market -- and it looks like it missed a few dividend payments during the crisis. https://www.google.com/finance?chdnp=0&chdd=0&chds=0&chdv=1&chvs=Linear&chdeh=0&chfdeh=0&chdet=1455751666472&chddm=987277&chls=IntervalBasedLine&cmpto=NYSEARCA:VWO&cmptdms=0&q=INDEXSP:.INX&ntsp=0&ei=4uTEVsCvBcz4esSJg4AF https://www.google.com/finance?chdnp=0&chdd=0&chds=0&chdv=1&... > That's why no other country on Earth that I know of has 30-year fixed mortgages. They are essentially a government subsidy to homeowners via Fannie/Freddie.
    - turar 11y ago
      Correct, that's why I said that it was an assumption. I picked that ETF because I think the underlying assets would do well over the next 30 years, and also because it's relatively cheap to other ETFs because of the under-performance you mentioned. You can substitute any other asset there really that you think would perform better than 3.5%.
  - distances 11y ago
    A bit offtopic, but is it normal to have interest rates locked for the whole duration of the loan? Around here the interest rates usually follow 1, 6, or 12 month Euribor[0] with a small bank margin on top. So yes, technically some people now could have loans with negative interest rates, but there is usually an extra clause for a minimum or 0% or 1% or somesuch. [0] https://en.wikipedia.org/wiki/Euribor https://en.wikipedia.org/wiki/Euribor

by turar 11y ago

JackFr 11y ago

> On top of that, it also depends where you think the interests rates will be in 10-20 years from now. If you believe that they will be higher than they are currently, then that's even more reason to keep that loan locked in for 30 years instead of paying it off sooner. That makes no sense. You'll be better off paying a lower interest rate than you would be not having a loan in a high rate environment?

turar 11y ago
Remember, the loan is locked in. Everything around you may be a high rate environment, but your loan is still 3.5% when regular bank savings account would be paying, say 7%. So, if you bought shares of an Emerging Markets ETF [1] with the money that you would have otherwise paid for accelerated mortgage payments. Today these shares are paying you around 3.5% in dividends alone. Fast forward ten years to a high rate environment, and ten years of buying ETF shares and reinvesting dividends, I'm assuming that the dollar amount of your shares would be higher than the amount of debt you would have otherwise paid off already. That's why no other country on Earth that I know of has 30-year fixed mortgages. They are essentially a government subsidy to homeowners via Fannie/Freddie. [1] https://www.google.com/finance?q=NYSEARCA%3AVWO https://www.google.com/finance?q=NYSEARCA%3AVWO
- ryandrake 11y ago
  You need to discount your calculations because your ETF is not risk free.
  - JackFr 11y ago
    In fairness the value of your home is not constant or risk free either.
- JackFr 11y ago
  Point taken about the high rate environment -- I'm not sure where I thought that other money would go. But it's still not obvious that you would be better off under your plan. You're financing two assets, you home and your portfolio with some mixture of debt and equity. Without making assumptions about the expected return of the housing market, the return on your portfolio, the variance of those returns and the horizon, its not clear that you'd still be better off. You say take advantage of the cheap (tax-favored too) leverage -- I'd be concerned medium term variance in returns. That ETF you pointed to is down over the past 10 years and underperformed the market -- and it looks like it missed a few dividend payments during the crisis. https://www.google.com/finance?chdnp=0&chdd=0&chds=0&chdv=1&chvs=Linear&chdeh=0&chfdeh=0&chdet=1455751666472&chddm=987277&chls=IntervalBasedLine&cmpto=NYSEARCA:VWO&cmptdms=0&q=INDEXSP:.INX&ntsp=0&ei=4uTEVsCvBcz4esSJg4AF https://www.google.com/finance?chdnp=0&chdd=0&chds=0&chdv=1&... > That's why no other country on Earth that I know of has 30-year fixed mortgages. They are essentially a government subsidy to homeowners via Fannie/Freddie.
  - turar 11y ago
    Correct, that's why I said that it was an assumption. I picked that ETF because I think the underlying assets would do well over the next 30 years, and also because it's relatively cheap to other ETFs because of the under-performance you mentioned. You can substitute any other asset there really that you think would perform better than 3.5%.
- distances 11y ago
  A bit offtopic, but is it normal to have interest rates locked for the whole duration of the loan? Around here the interest rates usually follow 1, 6, or 12 month Euribor[0] with a small bank margin on top. So yes, technically some people now could have loans with negative interest rates, but there is usually an extra clause for a minimum or 0% or 1% or somesuch. [0] https://en.wikipedia.org/wiki/Euribor https://en.wikipedia.org/wiki/Euribor