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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 pa

by 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
- minimax 11y ago
  In the US, the 30 year fixed rate mortgage is the most popular type of mortgage by a wide margin.

by turar 11y ago

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

minimax 11y ago
In the US, the 30 year fixed rate mortgage is the most popular type of mortgage by a wide margin.