This week will build slowly toward an amazing new way to de-seed your watermelon. But first . . .
Don Steinhart: “A coworker and I got into a discussion about investing money he obtained by refinancing his house. I contend that he effectively borrowed money to invest, which is essentially the same as investing on margin. He argues that he is only using the equity in his house, which is his anyway, so it’s not the same as borrowing. His monthly payment did not increase, because he simply extended the term of the loan. He views his house as an investment, so he’s just shifting investment dollars from one vehicle to another, while I see my house as a place to live, and any investment and tax advantages I gain are a side benefit. I say the bottom line is: he borrowed money to invest, and it’s a bad idea. In the name of avoiding having to read one fewer political column, perhaps you can help us to settle this argument.”
☞ Well, in my view, you’re largely right. The riskiest kind of borrowing would be with no collateral. There, if you can’t make payments on time, you get sold into slavery or, worse, featured on one of those ShowTime specials like the Sopranos. You don’t want this. Your coworker, by contrast, has 15 or 30 years to repay his mortgage; and the interest rate he’s paying, especially after tax, may be less per year than the loan sharks charge per week. So what he’s done is not insane. But it is borrowing to invest — you both seem to agree he is investing money he obtained by borrowing against his house. If he doesn’t see this, something tells me he may not fully appreciate the risks of the stock market, either.
This strategy could work out very well for him. But I think many people would be better served with a two-track strategy: Track One — The forced saving that comes from gradually paying off your mortgage, until one day, Praise the Lord!, you own your home free and clear. Track Two — The higher return you may well get (but may not) from a steady program of investing in stocks.