Use 30yr mortgage to fund mutual fund investment/retirement?

As rates continue to fall, I'm considering the following:
My home will appraise for ~500,000
I currently owe $200,000 in year 5 on a current 30 yr mortgage @5.875%.

I'm generally very financially conservative and have spent the last 5 years paying down mortgage debt (my only debt) as fast as possible (an extra $500/month toward princ.).

Does the following make sense:
1) Take out a $350,000 loan for 30 years (hopefully, at 5%)
2) Pay a monthly mortgage of ~2,000
3) Put the 150,000 into a conservative mutual fund to earn a modest 8% interest.

Given the tax advantages of the mortage interest, the numbers look promising. I understand that mutual funds don't automatically return 8%. Some years they may lose and some years they may get 16% or more. It's the average.

The numbers will create a nice cash reserve in about 5-10 years, which is comforting.

Does this make sense. The numbers all point to yes, but I don't know if I'm missing something.

Any suggestions?

FYI - I do have a separate Simple IRA for my retirement. This is to augment my retirement with an available cash reserve.

Don't do it!

First of all, a "conservative" mutual fund will *not* return a "modest" 8% return. The overall S&P 500 can be expected to return around 8%. If you're looking for "conservative" you'll need to sacrifice returns in order to reduce volatility. That's neither good nor bad - I'm just trying to illustrate the trade-off of volatility and performance.

Home prices are already falling. If you take cash out of your equity, you risk eventually becoming "upside down" - owing more than your house is worth.

Now, suppose the current recession deepens. Not only might you be upside down on your mortgage, your investments have lost money, too.

Do you think that's okay because, after awhile, the stock market will recover and your investments will climb again? No!

Here comes the double whammy: at the same time your home and investments are losing value, the ailing economy may cost you your job (or severely cut back on your income). Your income is reduced, but you already stretched your budget by taking on a higher mortgage payment. Suddenly, you're selling your investments at a depressed price in order to make your mortgage payment. In other words, you're selling your stocks before they've had a chance to recover. Yikes!

I can't imagine someone seeking a "conservative" mutual fund would take on something this risky. There's a chance this plan could work, but don't bet your home on it!

It might make sense to stop prepaying your mortgage and sock that $500 each month into a low-cost, no-load mutual fund (Vanguard Total Market Index comes to mind). If you're looking for leverage, considering buying ETFs in a brokerage account and buy on margin (a margin loan, like a home loan, is tax deductible). Even margin is risky, but there are no monthly payments as long as your equity balance is high enough.

Don't borrow against your house to invest in stocks. You'll sleep better at night.

Wouldn't it make more sense to sell your house when you retire and move to someplace where you can get a nice 2,000 square foot house for about $150K?


If you had made this gamble you mention about six months ago, you would be seriously hurting right now. Your plan sounds very risky. Borrow money to invest it? YIKES.

I wouldn't do it. If you have 3-6 months of pay stashed away in a high yield online bank already, great, if not, do it. If you have maxed out your 401k and IRA, great, if not, do it. If you have invested in other stocks, bonds, mutual funds, real estate, or commodities, great, if not, do it. One thing that you should realize is that your home is not an investment vehicle. It is your home, and you wouldn't want to gamble on it. Do all of the other things with that extra $500 until they are all maxed out. Paying the extra $500 now and not having the mortgage as a shelter when you are in a higher income bracket is rediculous. If you do not have your emergency fund of at least 3-6 months pay put away already, than you shouldn't be thinking about investing yet. I would never, ever use my home's equity for anything short of saving a family member's life. Bad idea!

I did the same thing about 18 months ago and have made enough off the investments to be worth it. Most investment income is long term gains so taxed at a low rate and my mortgage is tax deductible. As long as you can make the payments without the investment returns it is a good bet.

Unless I missed something there, what you are suggesting is borrowing money (using your home as collateral) in order to invest. This doesn't sound like a good idea to me. I can't think of a good reason to borrow money in order to invest.

You should invest whatever surplus income you have left over after you pay your bills and have some cash available in a checking or savings account that is readily accessible in case of an emergency (generally suggested that you have about 6 months worth of expenses.) Anything else you can safely invest without having to worry too much about market ups and downs or having to pull money out while the market is in a down cycle.

Wow, a conservative 8% mutual fund? I'M all ears, please share.

I have to say, that even as an evangelist of the Dave Ramsey plan, I am tempted myself with the 5% (or less) cash out on the house. If you have 15 years left in a good career and plenty of cash in savings, then at least alter your plan to take out only a 15 year mortgage. You will get a better interest rate. If you can't afford to do this in a 15-year window, then you shouldn't do it at all. Borrowing against the house to invest ... this is a bad idea but it is looking very tempting. Rates are going down still so there is no hurry. Don't forget there are lots of hidden costs with a refinance. It will run you about 2-3% in fees. And, the risk ... oh, the risk!

How do you know your home will appraise for 500k? I live in CA and home prices have been dropping like rocks the last 2 or 3 months. Homes that sold last year for 400k+, the banks are trying to sell them today for 250k and not getting any offers.

I'm seeing houses in my area dropping their prices about 10k every two weeks.