We bought a house, paid in full with cash. Then I got a small mortgage to invest for fun and profit.
Most of this I put back into the market as a lump sum.
Here are all the details. I will provide updates periodically to track total return.
Investing the Mortgage
Whether to have a mortgage or not is a topic of much debate amongst retirees of both the early and traditional type. Personally I think mortgages are great – low cost, low interest, tax efficient, etc…
Our mortgage is $250,000 30-year fixed 2.75% interest. Payments are $1,020.60 monthly and I pay property taxes and insurance directly (no escrow.)
Some of the proceeds I’m using for our normal everyday spending, but most I invested according to our asset allocation.
Closing Cost Details
Mortgage fees were reasonable – thanks to $3,000 in “Lender Credits” they actually paid me to get the mortgage in the first place.
(The company I worked with sold the mortgage to Uncle Freddie within minutes of closing, who then outsourced the mortgage payment handling to one of the larger banks. Score one for corporate welfare, I guess.)
Loan Estimate
I had to pay $700 up front for an appraisal as Freddie and Fannie had no info on this house (built 30+ years ago by the people we bought it from.) I heard this from multiple lenders so presumably it is accurate but still dumb – the appraiser spent 15 minutes in the house and concluded it was worth exactly what we paid for it. I know, I was shocked too.
After closing our homeowner’s insurance company credited $267.51 to my credit card. Apparently the escrow company sent them a check.
A few weeks later the escrow company sent me a check for $75 with the memo “Recording Overage Refund.”
Ultimately I ended up with a check for $249,974.83 via next day delivery and credits/checks/prepaid interest in the amount of $75.73, for a profit at closing of $50.56.
Investments
Of the total mortgage proceeds I invested $150,147, about 60% of the mortgage proceeds.
- 450 shares of VTI @ 222.61 ($100,174.50)
- 475 shares of VXUS @ 63.10 ($29,972.50)
- I-bonds @ $20,000 ($20,000)
This is roughly a 75/25 US/International split on the equity allocation and a token contribution to bonds. Normally I wouldn’t have bothered with the bonds but they are paying 7.12% for the next 6 months and I already had a Treasury Direct account so it only took a few minutes of my time.
Total Return
As of market close on Monday, January 10th, 2022, the total return on investment is +3.7%
Income
VTI
Dividends, Q32021 – $325.89
Dividends, Q42021 – $386.64
VXUS
Dividends, Q32021 – $169.34
Dividends, Q42021 – $447.07
I-bonds
Interest – $0 (no interest reported for 1st 3 months of ownership)
Total: $1,328.94
(Income not reinvested – used for current spending.)
Expenses
Mortgage closing costs: -$30.37 (scaled 60% of total to account for investing 60% of mortgage)
Mortgage interest, total: $1,290.58
Pre-paid at closing: $260.19
November 2021: $344.09
December 2021: $343.46
January 2022: $342.85
Taxes, Estimated (on dividends): $364.35
(effective tax rate: ~27.4%)
Per Vanguard, an estimated 97.57% of VTI dividends are qualified. For VXUS it is 73.76%.
Our 2021 tax rate for qualified dividends will be ~25.8% (15% dividends, 3.8% NIIT, and ~7% California (scaled for part year residents.))
The tax rate for non-qualified dividends will be higher, ~37.8% (12% ordinary, 15% dividends pushed out of 0% bracket, 3.8% NIIT, and ~7% CA.)
We will get no tax benefit for the deduction of mortgage interest or property taxes.
Total expenses: $1,624.57
Unrealized Gains
Recent prices from market close on January 10th, 2022.
VTI
Purchase price: $222.61
Recent price: $235.70
Gain/Loss(%): +5.9%
Gain/Loss($): $5,890.50
VXUS
Purchase price: $63.10
Recent price: $63.05
Gain/Loss(%): -0.1%
Gain/Loss($): -$23.75
I-bonds
Gain/Loss: 0%
Total gain(%): +4.5%
Total gain($): $5,866.75
Total Return
Original Basis: $150,147.00
Market Value: $156,013.75
Gain/Loss: $5,866.75
Income: $1,328.94
Expenses: $1,624.57
Net profit/loss: -$295.63
Total return(%): 3.7%
Total return($): $5,571.12
Summary
We got a mortgage on our house and invested some of the proceeds.
After a few months total return is positive at ~3.7%
So far so good.
I’m looking forward to following this series as it tracks with my perspective on paying down mortgages so long as the mortgage rate is hyper low–like what you locked in. Of course, it depends on the individual and their risk tolerances for sure.
Keep it up!
I think you should have moved to Texas or other no income tax state.
Why tho?
With an interest rate lower than the inflation rate I should have borrowed more
That should read “…NOT paying down mortgages so long as the mortgage interest rate is hyper low….”
Oops!
This was very popular to do in the 1990’s in California when housing prices were increasing yearly, and before the national housing market crash. People would refinance, and then take out cash for investments or purchases. It was very common.
Questions:
1. Why didn’t you just take out a small mortgage when you purchased the house. Did you make a cash offer on the house to have leverage to get the house?
2. Why didn’t you just establish a HELOC account for this amount, and then take out the cash?
Good luck. In general, the stock market is priced high. You also got a great interest rate.
Yes, cash offer for leverage.
Better interest rate with mortgage vs HELOC.
My great-grandfather was part of the 1% that owned stocks in 1929, so I’m genetically scarred when it comes to leveraged investing. I can see the logic here though. Ultimately it is about the degree of risk that you can swallow, and in the grand scheme of your portfolio 250k is not going to sink you even in an extended bear market.
No margin calls on a mortgage so minimal risk. And a small leverage ratio
Hi, why not just take out mortgage at the start of the process instead of paying cash up front? Is considered a re-finance if you get a mortgage later?
Timing
Yes, it is a refi.
that’s a great rate.. are you able to divulge name of the mortgage company?
Just pick any of the lowest rate options from Bankrate’s mortgage screener tool. Any one will do. This was something like watermark (? – I forget exactly) but as I said they sold it within minutes – there is no long term relationship possibility. The best option is to apply to 5 or 6 of them and then have them outbid the others’ loan estimates.
What happened to not buying but renting?
Life maybe. I expect owning to be a financial disaster compared to renting, but here we are.
Where’s the like button for this article? Love this approach. Makes sense with mortgage rates as low as they are.
Not that you don’t already know you can, but why not buy another $20k of I-Bonds (TY2022)?
The $20k is for me in 2021/2022. For Winnie to buy some also we would have to create a new account and it seemed like too much effort.
I jumped in on i-bonds too… my first time dealing with treasurydirect. The 7% rate seemed too good to pass up. Are you planning to cash out if/when rates drop (forfeit 3 months interest)?
Rates will drop for sure. If I need cash I may dump them, I’ll cross that bridge when I come to it.
Really though Ibonds are a hassle – and the purchase limits are so small that they can never be a serious part of a portfolio. I wouldn’t have purchased any if I had to create a new account to do it, I just happen to have some from 2005 or so (1% real interest rate) so everything was already setup.
JohnR, with interest rates where they currently are, and inflation heating up like it has been, even if the current 7+% interest rates on iBonds are reset after six months the interest rate will likely still be much higher than the mortgage rate GCC was able to obtain. Personally I wish the interest on my HELOC wasn’t as high or I would be doing the same tactic; just too much of a hassle right now to apply for the mortgage but I might change my mind in the near future.
Even if interest rates on I-bonds are zero for the next 6 months, it is still 3.5% annual yield.
Wow, 30-year fixed for 2.75% interest, that is really great deal! Well done Jeremy!
Even I couldn’t afford not to be a borrower at such low rates. I took mortgage in the middle of last year. It was no brainer.
That’s just what rates were in August/September. I missed the 2.5% rate by just a couple weeks
Jeremy, I love this idea and have been thinking about doing something similar myself. What are your thoughts on doing something like this to create more Roth IRA conversion space when laddering? Using the mortgage to cover annual expenses for several years, allowing for more to be converted each year?
Also, having so many credit cards and large lines of credit, did you have any issues getting approved by the mortgage company/underwriters? Wasn’t sure if this raises a red flag or not.
Just curious, you said you invested 60% of the mortgage, can you tell us what you did with the other 40%?
Looking forward to seeing more results of this experiment – cheers!
The remaining 40%-ish I have used for spending, some for all the expenses that comes with moving into a house (furniture, etc…) and some for the upcoming tax bill for selling lots of stock to buy said house.
My credit score is 800+ and strong balance sheet – no issues with approval based on credit cards, etc…
Debt as a tool in early retirement has lots of uses – including making Roth conversion space available (vs other forms of cash – selling stock, IRA withdrawals, etc…) I have a post coming on this.
That is awesome! What is the mortgage or lending company that refinance your mortgage so I could inquire as well?
Fixed mortgage rates are awesome and a great bet to lock it in. Wish we had fixed rates instead of our floating rate mortgages. Would’ve definitely followed your plan =)
How did you decide how much to borrow?
I picked the amount largely based on cash flow, $1k/month.
This was a small change in total annual spending but provided a ton of benefit to taxes and liquidity.
I should expand on the thought process in a blog post.
The idea of leveraging my home scares the daylights out of me, even though I have the cash to pay it off if I’d need to. I’ve reached FIRE, so I really don’t have a steady income, only what I pull every month. Am I being pound foolish?
Looking forward to the next edition of this story.
Nah, you are wiser than I am in this.
I’m curious about the facts/reasoning that led you to a fixed-rate over variable-rate loan. My general understanding is that a fixed rate will be more expensive on average, because you’re paying for insurance against unexpected interest rate increases. Somebody has to take the interest rate risk, which has value, and I assume overall it is borrowers who pay for that value. Many homebuyers probably need that insurance, if their cashflow is close to maxed out or they are stretching to buy the most expensive house they can afford, but that likely isn’t you.
It isn’t me, either. Unlike the above poster, I don’t think fixed rates are awesome. When I got my last mortgage in late 2015, I calculated that a 5/5 ARM was guaranteed to be cheaper over the first 15 years (because rate rises are capped) and likely to be cheaper over the entire term than a fixed 30-year. Because I don’t need the insurance against rate increases, I didn’t buy it.
Maybe the mortgage market has changed since then, and banks are always promoting different products for their own reasons, so maybe a fixed really is a better deal in 2021/22. What did you find?
Lower interest rates would be better, but at the time I was looking the delta in interest rates between 5 year ARM and 30-year fixed was less than 0.5% and I couldn’t get $3k in lender credits on the ARM
What did you do with the other $150,000?
Is that just extra living expenses?
I borrowed $250k and invested $150k. So $100k remaining.
About $80k I spent – $20k for rooftop solar, $10k for property taxes, moving expenses, home furniture, cargo bike, etc… the rest is still in my checking account but will be gone by April (big tax bill this year )
What is lender credits and how do you get them? I never heard of it.
Ask for them.
It’s a discount.
Now that we’re more than 8 months into the year, how are you feeling about this decision?
FWIW, we have a 30-year fixed at 2.375% on a second home and I don’t think we’ll ever pay it off!
Wow, 2.375% is amazing. You have to love free money.
I assume our investment is down since the market is, but yeah I guess I feel fine about the decision. I’ll look at the numbers and write an update next month / October as that will be the 1-year mark