Leverage low refi-rate?

[benchmark]

Given the new low mortgage refinance rate (you can take out a 30-yr mortgage @3.875% or less, depending on your loan amount), I'm thinking about taking money out of the house and invest to get higher return. Has anyone thought about this? is it worth the hassel/risk? 

[Guest rimm_never_sleeps]

Buffett would advise against it. and he is pretty good with advice. it's tempting. But Buffett would say why take the risk? what's the hurry? if you're a good investor you're going to get rich anyway. if you're not you have no business doing this. This was a terrible strategy in 2005-2007 through 2008. I would hate to have deployed that strategy then. lots of sleepless nights. anyway the worst case never happens. unless it does.

[Kraven]

Given the new low mortgage refinance rate (you can take out a 30-yr mortgage @3.875% or less, depending on your loan amount), I'm thinking about taking money out of the house and invest to get higher return. Has anyone thought about this? is it worth the hassel/risk?

 

It's a great idea if you are 100% sure you are going to earn a return greater than 3.875%.  It's similar to the Will Rogers advice of buy stocks that go up; if they don't go up, don't buy them.  If you know you can do it, then do it, if not, don't.

[LC]

Given the new low mortgage refinance rate (you can take out a 30-yr mortgage @3.875% or less, depending on your loan amount), I'm thinking about taking money out of the house and invest to get higher return. Has anyone thought about this? is it worth the hassel/risk?

I don't think it's a good idea. Who knows what could happen in the next 5-15-30 years...I don't think you should be betting your house on ANYTHING. That's just my personal opinion.

[benchmark]

Given the new low mortgage refinance rate (you can take out a 30-yr mortgage @3.875% or less, depending on your loan amount), I'm thinking about taking money out of the house and invest to get higher return. Has anyone thought about this? is it worth the hassel/risk?

 

It's a great idea if you are 100% sure you are going to earn a return greater than 3.875%.  It's similar to the Will Rogers advice of buy stocks that go up; if they don't go up, don't buy them.  If you know you can do it, then do it, if not, don't.

 

For safety, simply buying BRK or FFH should give you better than 4% return, as long as you can tolerate the lumpiness -- that's why I'm thinking about this.

[CONeal]

Given the new low mortgage refinance rate (you can take out a 30-yr mortgage @3.875% or less, depending on your loan amount), I'm thinking about taking money out of the house and invest to get higher return. Has anyone thought about this? is it worth the hassel/risk?

 

It's a great idea if you are 100% sure you are going to earn a return greater than 3.875%.  It's similar to the Will Rogers advice of buy stocks that go up; if they don't go up, don't buy them.  If you know you can do it, then do it, if not, don't.

 

For safety, simply buying BRK or FFH should give you better than 4% return, as long as you can tolerate the lumpiness -- that's why I'm thinking about this.

 

back in 2007 I know a guy that thought about doing the same thing you are and actually for the same reason of buying BRK.  BRK lost something like 1/3rd its value.  Would you be able to sleep if that happens?  Would your wife shoot you/leave you if that happens?

 

As the old saying goes "Don't shit where you sleep"

[fareastwarriors]

Given the new low mortgage refinance rate (you can take out a 30-yr mortgage @3.875% or less, depending on your loan amount), I'm thinking about taking money out of the house and invest to get higher return. Has anyone thought about this? is it worth the hassel/risk?

 

If you can afford it, have a big emergency fund, and have a stable job/income, then it might be worth it. Using "leverage" might more risky but sometimes you gotta risk it to get the biscuit.

[Martian]

I think Buffett said something like this about the LTCM failure..why risk what you have and what you need for something you don't have and you don't need ?

[Kraven]

Given the new low mortgage refinance rate (you can take out a 30-yr mortgage @3.875% or less, depending on your loan amount), I'm thinking about taking money out of the house and invest to get higher return. Has anyone thought about this? is it worth the hassel/risk?

 

It's a great idea if you are 100% sure you are going to earn a return greater than 3.875%.  It's similar to the Will Rogers advice of buy stocks that go up; if they don't go up, don't buy them.  If you know you can do it, then do it, if not, don't.

 

For safety, simply buying BRK or FFH should give you better than 4% return, as long as you can tolerate the lumpiness -- that's why I'm thinking about this.

 

Sounds like you got your answer.  Since BRK or FFH will do better than 4% I guess you should go forward. 

[Ross812]

Individuals who used their homes as ATM machines got us into this recession in the first place.

[Mephistopheles]

As long as you have a stable income to pay off the monthly mortgage, then I think it is almost guaranteed you will make borrowing at 3.875% and investing it in Berkshire at current prices even. Not all borrowing is bad. Buffett says you shouldn't be doing it because he's speaking to the masses. Most people shouldn't be borrowing money to invest. Think of it as opening your business with borrowed money. Or buying a house to put out for rent with borrowed money. It's the same concept. I would argue that borrowing at less than 4% to invest in Berkshire at these prices over a 30 year time period is safer than borrowing money for most other types investments.

[matjone]

Say there's a big economic collapse and the market goes down 90% and unemployment goes to 20% or whatever.  You lose your job, your portfolio is way down, and businesses are failing left and right.  If you can weather this and still easily meet the payments then something like this might make sense.  The only other time I can see doing something like this is if you saw a bond selling below par with a really safe coupon that covered the interest payments, and I'd want to be damn sure that the issuer could easily make the coupon payments under the worst case scenario.  I mean it would have to be like proctor and gamble type safety.  In other words, it's probably never gonna happen.

 

I do agree that berkshire is probably safer than most investments over 30 years but you have to be sure you make it through those 30 years.  In the meantime you don't control the cash flows that berkshire has coming in and you have to make the payments.  And what looks like stable income could disappear during a depression.

[compoundinglife]

I think Buffett said something like this about the LTCM failure..why risk what you have and what you need for something you don't have and you don't need ?

 

In the Univ. of Florida MBA talk he mentioned this. He was referring to the fact that they were a group of people who were insanely intelligent, with tons of experience in securities and they put the majority of their net worth into their own highly leveraged fund and blew up.

 

"If I ever write a book its going to be called Why Smart People Do Stupid Things, my partner says it should be autobiographical". 

 

"To make money they didn't have  and didn't need they risked what did they have and did need and that is foolish".

 

 

[compoundinglife]

As long as you have a stable income to pay off the monthly mortgage, then I think it is almost guaranteed you will make borrowing at 3.875% and investing it in Berkshire at current prices even. Not all borrowing is bad. Buffett says you shouldn't be doing it because he's speaking to the masses. Most people shouldn't be borrowing money to invest. Think of it as opening your business with borrowed money. Or buying a house to put out for rent with borrowed money. It's the same concept. I would argue that borrowing at less than 4% to invest in Berkshire at these prices over a 30 year time period is safer than borrowing money for most other types investments.

 

Ultimately it depends IMO on how leveraged you are. If we were to end up in a repeat of 2008/2009 tomorrow, you were to loose your source of income or something else bad happens would you be at risk of blowing up? 

[Uccmal]

No, no, no.....

 

I agree with those who advise against it.  I dont normally do advice preferring to relate actual experience.

 

I use leverage in a margin account.  Our house is in my Wife's name and my name.  My margin account is in my name only.  They cant touch the house.  It distinctly separates the business from the household.

 

As to margin calls, I have had it happen twice, in fall of 2008, and spring of 2009.  Both times I got too smart and wrote puts that turned against me.  Once I bought out of the puts at a loss I was clear.

 

 

So, I dont write puts any longer.  Leaps dont use leverage in your account, when your buying them.  Calls are cash only.

 

The leverage I use right now would be invested in marginable stock distributed amongst FFH, BAC common, BAC warrants, RBS preferreds.  It is not a huge amount overall.  I could sell my FFh common and get rid of the margin entirely. 

 

I also have a significant amount in RRSPs (cdn equivalent of Roth or IRA accounts). 

 

The only possible advice I would ever offer is to refi your mortgage to 30 years.  Invest the difference in your monthly payments. 

 

Otherwise, keep business separate from house.  Someone suggested above that people mortgage their homes to start a business.  How many have failed?  My guess is 80-90%.  They are left trying to find a job to recoup what they lost.

 

Regards to holding Berkshire:  No one knows the future these days.  Removing Buffett which will almost certainly occur in the next few years could have totally unknown effects.  We just dont know. 

[anders]

Im in the inflation camp so to be able to lock in 3.8% for 30 years would be a one in à lifetime opportunity! Depending on your current LTV on your house, and choosing à couple of good long term investments, the reward many times outweighs the risk... Your interest and principal will be constant for 30 years.. What do you think your salary will be in 5, 10, 20, 30 years from now? What do you think brk, ffh will be worth? I would make sure to be covered x% of house price decline and surf on the wave!

 

US credit is now the cheapest in history, be greedy when others are fearful.. When the treasury bubble burst, you will be a very happy man..

 

Best,

[jeffmori7]

No, no, no.....

 

I agree with those who advise against it.  I dont normally do advice preferring to relate actual experience.

 

I use leverage in a margin account.  Our house is in my Wife's name and my name.  My margin account is in my name only.  They cant touch the house.  It distinctly separates the business from the household.

 

As to margin calls, I have had it happen twice, in fall of 2008, and spring of 2009.  Both times I got too smart and wrote puts that turned against me.  Once I bought out of the puts at a loss I was clear.

 

 

So, I dont write puts any longer.  Leaps dont use leverage in your account, when your buying them.  Calls are cash only.

 

The leverage I use right now would be invested in marginable stock distributed amongst FFH, BAC common, BAC warrants, RBS preferreds.  It is not a huge amount overall.  I could sell my FFh common and get rid of the margin entirely. 

 

I also have a significant amount in RRSPs (cdn equivalent of Roth or IRA accounts). 

 

The only possible advice I would ever offer is to refi your mortgage to 30 years.  Invest the difference in your monthly payments. 

 

Otherwise, keep business separate from house.  Someone suggested above that people mortgage their homes to start a business.  How many have failed?  My guess is 80-90%.  They are left trying to find a job to recoup what they lost.

 

Regards to holding Berkshire:  No one knows the future these days.  Removing Buffett which will almost certainly occur in the next few years could have totally unknown effects.  We just dont know.

 

Al, why not just use some leverage through an HELOC instead of using margin directly in your account? Won't the rates be better and the margin call be a no-event?

[Uccmal]

Hi Jeff,  The Heloc would be secured against the house which sort of defeats the purpose.  Lose the job, and investments at the same time, and lose the house.  Unlikely, but possible.  I restarted with nothing but student debt, at 31, and am getting to old to retrace my steps.  Margin interest rates are lower than a Heloc at the moment. 

 

My plan when I leave paid work in a year or two, is to pay down the mortgage completely, and use a Heloc at that time at about 25% the value of the house.  For US boardmembers: Mortgages are not tax deductable in Canada, lines of credit are.

[matjone]

Don't HELOC's have adjustable rates?  I always thought that was the case which kept me from ever looking too much into them.

[Uccmal]

Don't HELOC's have adjustable rates?  I always thought that was the case which kept me from ever looking too much into them.

 

Yes.

[Mephistopheles]

Say there's a big economic collapse and the market goes down 90% and unemployment goes to 20% or whatever.  You lose your job, your portfolio is way down, and businesses are failing left and right.  If you can weather this and still easily meet the payments then something like this might make sense.  The only other time I can see doing something like this is if you saw a bond selling below par with a really safe coupon that covered the interest payments, and I'd want to be damn sure that the issuer could easily make the coupon payments under the worst case scenario.  I mean it would have to be like proctor and gamble type safety.  In other words, it's probably never gonna happen.

 

I do agree that berkshire is probably safer than most investments over 30 years but you have to be sure you make it through those 30 years.  In the meantime you don't control the cash flows that berkshire has coming in and you have to make the payments.  And what looks like stable income could disappear during a depression.

 

Fair enough. I should have added: make sure to have a large enough equity cushion/income in terms of being absolutely sure that you'll be able to pay off the loan. Like compoundinglife mentioned, ultimately it depends on how leveraged you are.

[Mephistopheles]

 

Regards to holding Berkshire:  No one knows the future these days.  Removing Buffett which will almost certainly occur in the next few years could have totally unknown effects.  We just dont know. 

 

I think Buffett's marginal utility at Berkshire decreases every year as they acquire more and more companies. Berkshire's 70+ businesses have created a strong momentum that will be running strong well after Buffett is gone. These businesses also provide a large lineup of extraordinary executives who can be qualified to take helm at the top if necessary. With two great investors now helping too manage the investment portfolio, I don't doubt that we will see good investment returns moving forward. Finally, Howard Buffett as Chairman with a first class board of directors, Berkshire's culture will be preserved. IMO, the chance of Berkshire being a bad investment without Buffett going forward is virtually the same as the chance of it being a bad investment with him.

[benchmark]

As long as you have a stable income to pay off the monthly mortgage, then I think it is almost guaranteed you will make borrowing at 3.875% and investing it in Berkshire at current prices even. Not all borrowing is bad. Buffett says you shouldn't be doing it because he's speaking to the masses. Most people shouldn't be borrowing money to invest. Think of it as opening your business with borrowed money. Or buying a house to put out for rent with borrowed money. It's the same concept. I would argue that borrowing at less than 4% to invest in Berkshire at these prices over a 30 year time period is safer than borrowing money for most other types investments.

 

Ultimately it depends IMO on how leveraged you are. If we were to end up in a repeat of 2008/2009 tomorrow, you were to loose your source of income or something else bad happens would you be at risk of blowing up?

 

Agreed on amount of leverage.

 

I don't have use any leverage in my investment, no margin account. It's really the rate was so low that it's tempting to do it.

 

Now what's the safest investment? I think BRK will do fine, even w/o Buffet. If I really want to juice the return, I would have sold all my brk and buy wfc warrants... or any other financial stocks that have been discussed on other threads.

[Uccmal]

 

Regards to holding Berkshire:  No one knows the future these days.  Removing Buffett which will almost certainly occur in the next few years could have totally unknown effects.  We just dont know. 

 

I think Buffett's marginal utility at Berkshire decreases every year as they acquire more and more companies. Berkshire's 70+ businesses have created a strong momentum that will be running strong well after Buffett is gone. These businesses also provide a large lineup of extraordinary executives who can be qualified to take helm at the top if necessary. With two great investors now helping too manage the investment portfolio, I don't doubt that we will see good investment returns moving forward. Finally, Howard Buffett as Chairman with a first class board of directors, Berkshire's culture will be preserved. IMO, the chance of Berkshire being a bad investment without Buffett going forward is virtually the same as the chance of it being a bad investment with him.

 

Respectfully disagree.  I dont want to ruin the thread with this topic.  It is all conjecture anyway, either way. 

[bobp]

Another option - put the money in something short term, lose a small amount, and if/when rates rise dramatically, buy long term.  Maybe you lose a small amount for five years and make money for twenty five.