33 percent into AMZN. 33 percent into AAPL. 33 percent into NVDA. Let's check back in a year.

The problem with a $300,000 mortgage at 3% and investing $300,000 in the market is the 3% is fixed and you have to pay it while the market return is an average.

Say you bought a house on 8/1/2000 for $300,000 at 3% and invested $300,000 in the S&P 500 the same day. Say you make your mortgage payments each month buy selling a portion of your S&P 500 investment. By 6/1/2018, you still owe $154,500 on the mortgage and your grand total in the S&P 500 is $82. The next month, you don't have enough S&P 500 to make your payments.

How can that be? On 8/1/2000, the S&P 500 was 1,485 and on 6/1/2018 it was 2,794. That's about 3.5% a year which exceeds the 3% on the mortgage. The problem is, the market tanked twice during that period and you had to sell in a down market to make the payments. The returns on the shares you had left weren't enough.

My hypothetical is flawed in that I didn't take dividends into account, but I also didn't take taxes into account either. I suspect the two would mostly offset each other. I also purposely picked the date closest to when I sold everything I had in the market to buy the house I still live in.

I'm in the pay off the house group. Pardon the pun, but it's a lot easier weathering a financial storm with a roof over your head.

It's flawed in a couple ways. First you assume that the only way to pay mortgage is from S&P fund, second that you never locked in any of your returns. Third, I don't have the energy to verify this, but in the early 2000's you were drawing down on money that was getting phenomenal returns, so you were not actually reducing principal.

quote:

Originally posted by Skins2881:
It's flawed in a couple ways. First you assume that the only way to pay mortgage is from S&P fund, second that you never locked in any of your returns. Third, I don't have the energy to verify this, but in the early 2000's you were drawing down on money that was getting phenomenal returns, so you were not actually reducing principal.

You're not re-investing most of the returns either, you're using the majority of returns to pay the mortgage, so the $1.27 mill figure is WAY off. However, from 2008-2013, you'd have been pulling money out of principle and reducing principle that was already greatly reduced by the stock market crash. To make any gains you'd have to make about a steady 5.5% return + tax each year just to pay the mortgage.

If you paid the $300k mortgage off, then invested the $1265 payment (you were normally making) assuming a 6% return, in 30 years you'd have $1.365 million in the bank and a paid off house that's greatly appreciated in value also. AND, regardless of what your investments do, you're house is paid for.

But, Reyhrh is right, without knowing more info about the OPs immediately prior situation......age, goals, initial situation, investment/retirement goals, all of this advice is useless.

quote:

Originally posted by Skins2881:
It's flawed in a couple ways. First you assume that the only way to pay mortgage is from S&P fund,

Yes, by design in response to Aeteocles post on the previous page where he invests $300,000 and gets a $300,000 mortgage to buy the house. He specifically says to use the invested money to make the mortgage payments.

quote:

second that you never locked in any of your returns.

I'm not sure what you would be locking in. 8/1/2000 was a peak for the S&P 500. It then slowly slid to 854 on 10/1/2002 before it began to rise again. It didn't hit the 8/1/2000 1,485 again until 5/1/2007.

If you want to switch my example up and pay the $1,265 mortgage payments with other money while investing a lump sum of $300,000, then you would still have been better off paying cash for the house and investing the $1,265 each month in the S&P 500. The lump sum would get you 202 shares which 18 years later would be worth twice what you paid for them. By buying monthly over the same 18 year period, you would wind up with more shares and therefore more money at the end.

My point is that the decision of whether or not to pay off the house or invest the money is not as simple as saying the mortgage rate is X and the rate of return on the investment is greater than X. Saying the S&P 500 made 10% a year since 1929, so it's ok to invest in it rather that rather than paying off a 3% mortgage is naive.