@doschicos I’ve done an informal poll, lol, and found that many upper middle class folks who can pay off their mortgage prefer not to and put that money into investments/savings instead. This is definitely the norm - among those who can pay off their mortgage.
Not an economist but now is really not a good time to invest in the stock market as there seem to have so many uncertainties: trade wars/2020 election, Brexit, Iran/Middle East, just to name a few.
Actually, this kind of questions makes me want to get out of stock market completely. ?
why not just margin your stock account?
Agree with dostichos, assuming a 7% return is not conservative. Before he passed, John Bogle predicted a 4% return on equities.
I’d suggest just investing the $1100 per month in the market and watch it grow.
OP, look at it this way: why would anyone be willing to lend you money at a lower rate than they could get by investing “conservatively” in the stock market? Maybe there’s a risk premium that they understand and you don’t.
There can be cases where what you suggest makes sense, but usually not for people who don’t understand the risks. Generally, what those people do in a downturn is panic, sell, then buy again when prices go up. So they never get anywhere close to the historic average return of the market anyway.
Gourmet- I don’t believe that’s the norm even if your informal poll suggests that it is. What part of the country do you live in; what has the appreciation looked like over the last ten years, how did the elimination of SALT in the last tax cut impact housing values??? You can’t talk to 30 upper middle class folks- all of whom live in Palo Alto, Belmont, Chappaqua or Winnetka, and extrapolate to the entire “upper middle class” norm.
Most of the people I know who are around my age have most definitely paid off their mortgages if they can. They are eyeing a second home (if they don’t have one already); they are looking at possible relocation for that “final final” job before retirement, they are looking at downsizing and possibly moving overseas for one last adventure. Even if these changes are five and ten years off, solidifying their financial position by reducing the monthly “nut” is a key priority. Since property taxes only seem to go in one direction (up) and maintenance costs of a home also seem to go up with no end in sight (thank you, snow and salt and the constant upkeep of a driveway and shingles) the people I know who can- celebrate the “end” of mortgage payments and the beginning of a new chapter.
Do they expect their homes to finance their retirements? The ones with faulty memories who don’t remember the bust housing years… 2009- ugh. 2002- ugh. 1987-- oh brother. Selling in a hurry (when you have to) when the market hits a trough is never fun.
Whether it makes sense is for YOU to decide. If you can take out a $200K equity loan at 4% and YOU think that you can earn more than that by investing it [taking into account limits on deducting the interest on home equity loans and the taxes on dividends & whatever you might invest in], then go for it. It is not as much of an assured thing as your original post seemed to assume – as many people have tried to point out. It is YOUR decision. Do what you want. Don’t come here crying if it does not work out.
Now. That said, I will admit to doing something similar. BUT … I was able to game the tax system a little bit. We sold our house right before D started high school and bought a bigger [and more expensive] one. Rather than use our return on equity to pay down the new mortgage [which would have had a minuscule effect on the monthly payments], I invested it – at more than the interest rate on our mortgage, so I totally understand where you are coming from. BUT … that money was part of a purchase money mortgage and thus not subject to any limitations on tax deductions. AND … I put the money into a series of tax deferred investments that paid for D’s college year by year.
Even so, I’m not sure I came out very much ahead … although I am sure that I didn’t lose anything [except for my time dealing with more complicated tax returns]. Yes, we’re paying on a higher mortgage balance for 30 years, but we stayed under the cap for federal deductions. We’re screwed on the property tax deduction but no one saw that coming, so I don’t kick myself on that one.
I suggest you go talk to a pro.
“Actually, this kind of questions makes me want to get out of stock market completely”
Indeed. Interesting to contrast with the various comments in threads last year when the market was lower, and more importantly was declining, from people saying they were taking money out of the stock market. Lots of people try to time the market, but buy high and sell low is all too common.
And really, time in the market being the real magic factor won’t be likely to benefit OP, would would probably be 50 or thereabouts. .
The problem with this strategy is that you have to pick the right time to do it. It is very timing based.
None of us can accurately predict the future of the stock market. None of us can predict whether this is a good time to put a large chunk of money into stocks all at once. However, I would be surprised if this turned out to be a good time to borrow $200,000 and put it into stocks.
“Actually, this kind of questions makes me want to get out of stock market completely”
My first reaction also.
If you are under 50, then almost always is a very good time to put 10% or even 20% of your income every year into tax advantaged retirement funds. Those of us who can afford to do so should probably encourage our kids to do exactly that. One advantage of this scheme is that you invest gradually over time, so that the long term trend of the market matters but short term swings do not. This is very different from taking on debt to invest.
Actually, I am considering to do something silmilar. I am building a house. First, I thought I will sell some of my holdings to fund the build. Then, I got an offer for a home equity loan at 3.75-4%. I could just get a home equity loan and pay off slowly rather than deplete my holdings, which will be a taxable event.
This isn’t the place for investment advice. You need to talk to a licensed financial planner before you do something like that.
For heaven’s sake avoid licensed financial planners.
We have made a decision never to do any financing of our house for anything other than…the house. In other words, we would not use a mortgage to invest elsewhere.
We have a home equity line, and actually will use it likely this year to get central AC installed…finally. But that is an improvement to the house (we are the only house on our street that hasn’t done this…yet).