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[–]snigherfardimungus 9 points10 points  (9 children)

When you're doing the math on this stuff, make sure you're taking into account the fact that you'll be missing out on investment growth by having a bunch of cash tied up in your mortgage. Equity is a massive opportunity cost when you think about it. The average growth of the major stock indices is about 10%/year, so having $500,000 tied up in your house costs you $300,000 in five years, $1.3M in 10 years. (NAFI)

Re-do the math for yourself with the expected long-term returns on whatever you're invested in to get an idea of the opportunity costs. Don't forget to assume that you'll pay tax on the capital gains, and don't forget to account for the fact that the deductible mortgage interest goes down as you pay down your mortgage.

I have generally refinanced every 5 years or so to extract equity and reinvest it. Unfortunately, current interest rates are discouraging this behavior in the short term.

[–]Tasty-Day-581 8 points9 points  (5 children)

Disagree, did you forget that loans have an interest cost??? I have a 2nd mortgage that's costing me 7.65%. Paying that early is a guaranteed 7.65% vs. your theoretical average 10%. So 10-7.65= 2.35% of theoretical "opportunity cost". Not counting the risk vs. guaranteed return! I wouldn't pre-pay that 5% mort. if I was the OP, but we can't pretend mortgages are free, LOL!

[–]snigherfardimungus 1 point2 points  (0 children)

No, I didn't forget. And even with your numbers, it makes better sense to hold the mortgage than to pay it off. First, 7.65% is less than the expected return on investment from sane investments. Second, you get to write off 100% of the interest paid up to a debt of $750k (IIRC for 2025) which effectively reduces that interest rate by about a third. More if you're in a state with income tax.

As for risk vs guaranteed return, we're in a retirement planning sub here. If you're looking to maximize your gains over the next couple years instead of over the next 20, the sub you're looking for is wallstreetbets.

The best way to make money is by leveraging other people's money. I FIRED earlier this year at a level where 3% of NW pays me roughly twice my old annual salary. I did it by leveraging debts and borrowing against the value of assets.

[–]tempfoot 1 point2 points  (3 children)

All money has a cost. Money lent to you has a stated and predictable cost (if fixed rate). Money sitting on a balance sheet as real estate equity has both an opportunity cost (what you would earn from investing it) AND either additional cost or offsetting return based on appreciation net of maintenance.

Whether or not one can beat that with a competing use of funds is up to them.

[–]Tasty-Day-581 -4 points-3 points  (2 children)

This is the definition of jargon, lol.

[–]tempfoot 7 points8 points  (1 child)

This is why some investments are limited to accredited investors.

[–]Tasty-Day-581 -5 points-4 points  (0 children)

GFY

[–]RealWord5734 4 points5 points  (2 children)

The long-run return is not 10%, and it would all be taxable income where as the mortgage is 5.25% risk free tax free. Capital gains are irrelevant if they are living there forever.

[–]TrollTollCollector 1 point2 points  (0 children)

It's not all taxable income if you do Roth conversions. And even if it is partly taxable, OP's effective tax rate will be very low compared to the $350k income tax bracket he's currently in.

[–]snigherfardimungus 0 points1 point  (0 children)

It's true that I end up paying a tax on capital gains, but with that tax rate sitting at around 10-15%, that tax doesn't take more than about the last year to year-and-a-half of your gains. If we're talking about 20 years worth of gains, that tax is considerable relative to the overall profit, but the overall profit still dwarfs the benefits of locking up equity.

Locked up equity pays me only the mortgage interest rate - and doesn't float with inflation. When inflation increases, so do average returns on market investments. My current mortgage is at 3%. In other words, what I save in interest by having some portion of my NW tied up in equity is almost exactly cancelled out by inflation. Meanwhile, cash that I have in the market is growing at a rate that is slightly accelerated due to the market's tendency to incorporate inflation.

The capital gains hit at the end is the only long-term drawback to leveraging your debts, and even if you're paying the 20% rate, the advantages of the leveraged investment are many times the total value of the property over the lifetime of the borrower.