Should I borrow equity from my house and invest it?

In this post, I will cover a widely debated topic: Should a homeowner take equity out of their house to invest? I will cover three aspects. The investment here are mutual funds with a 20 year history of 13-16%...
and can be found: http://www.thestreet.com/funds/mutualfundinvesting/10385337.html)
We will assume our homeowner has a $300,000 mortgage at 7% on a 40 year fixed. I'm using 7% because it is a little high right now, and the mortgage amount is right for the Pacific Northwest market. The 40 year fixed is becoming the norm.

The first aspect will be the homeowner who takes out a 40 year mortgage and doesn't invest. He just makes his payments and gets the appreciation out of the house and the tax benefits from the interest deduction.

The second aspect will be the homeowner who pays off his $300,000 mortgage early and invests the mortgage payment into mutual funds. Once his mortgage is paid off, let's assume for sake of conversation that he continues to make his payment, but into a mutual fund.

The third aspect will be the homeowners who takes $150,000 cash out from the equity he has built up in his house and dumps it down into a mutual fund, then proceeds to make his monthly payments for 40 years to pay off the mortgage. He does not invest further into the mutual fund. (I am using a 150K mortgage instead of a 300K mortgage because many folks in the Pacific Northwest, who've owned a home for the past 3 years, have realised 150K in equity. Using a 300K perspective would be too favorable and unrealistic)


Our guy in the first perspective will realise this. He has a 300K mortgage at 7% interest for 40 years. His monthly payment is $1864.29. At the end of 40 years, he will have paid $894,861.04 in total payments. His total tax deduction is $594,861.04. If he's in the 25% tax bracket, that means that he will get $148,715.25 back. That means, ultimately, he will have paid $746,145.79 in total payments. At the end of 40 years, it's safe to say the home will be worth $968,611 (assuming a 3% annual appreciation rate).

So, our 1st guy has paid $746,145.79 in total payments to get a home worth 1.5MM tops. Think you can retire on that?


Let's continue...


Our second gal pays off her 300K mortgage early, and starts to invest. Let's say it takes her 10 years to pay off the mortgage, which isn't unrealistic (the median income in Seattle, WA is 70K per year). She then invests for 30 years, which would equal the 40 years of our guy in scenario #1. She invests at an annual rate of return of 15%. You can click on the above link to find the Best Performing Funds over a 20 year Period. Yes, these 20 funds have performed anywhere between 13% and 16% for each of the past 20 years! She invests the monthly payment of our guy in scenario #1 into a mutual fund through her 401K/IRA/SEP/Deffered Tax Retirement Fund. That is $1865 each month into a fund. At 15% annual rate of return, she will have made: $11,189,036. When she taps the retirement account, she'll get taxed at roughly 30%. That means she only brings home 7.8MM dollars.

Now, do you think you can retire on that?


Our third aspect involves a hard working husband and really smart, savvy wife (whom the husband listens too). They realise their current appreciation and take $150,000 out of the equity of their home. That's all they invest into the same fund that our gal from scenario #2 invests in. They don't pay monthly into the fund, they just watch their investment grow. They use a Retirement Account for deferred tax purposes. What do you think they're worth at the end of their 40 year mortgage?

$40,179,532 dollars. Yes, that's right. But we can't forget the 30% tax can we? Awww....too bad, that means they only get 28MM dollars.

Now, do you think they can not only retire on that, but leave the principal untapped and retire only only on the interest payments? Then, when they die, they can give like they've never given before.

Work hard to live well and then give gladly~thanks!