I am so happy to write this question to all you smart people out there!
Ok here it is:
My father is getting a lump sum of money and owes $80,000 on his mortgage with a 3.625 rate. His payments with principal and interest would be $944 a month. He wants to pay off his mortgage with the money, but i offered to pay his mortgage if he would instead give me the lump sum. Essentially I would get a 7% return if invested in the S&P 500,and after his mortgage is paid off, i would give him 40% of what I made minus the mortgage I paid. So if I use a interest calculator it would equal me making $137,000 on the $80,000 initial investment with a 7% return after the 8 years it takes to pay off his mortgage. If i minus the $90,000 from the mortgage and interest i paid, I would profit $47,000. I would give him 40% which equals $18,800 and i would be left with $28,200.
HERES MY QUESTION:
Would it be smarter to refinance the home for 30 years at 3.68? That would leave with a $450 monthly payment and i could then save another $500 (i would of been paying $944) and invest that extra $500 into the same fund. I just feel the longer i can string out the lower 3.6 interest i can make more by investing at 7%. Am i not getting something here?
Wed Jun 29, 2016 5:39 am
Cash: $ 380.45
Joined: 09 Feb 2009
Your only thinking of the positive outcome of investing the lump sum. When investing you must calculate risk. Let's say you invest the 80k and the market tanks 40% on average such as it did in 2008 right around the presidential race. Now that 80k is only worth 48k. Do you have other money should this idea not pan out? Or is he willing to wait out the market to regain his money, meanwhile he's paying interest on his mortgage? I wouldn't do it if it were me, to much risk. He's gaurenteed a 3.625% on his money, plus he no longer has to pay interest.
To answer your question regarding refinancing the mortgage, as you mentioned in the second sentence, "He wants to pay off the mortgage". I don't think he's interested in prolonging the term of the loan for a lower payment from what you've stated. Again, if it were me, just let him pay off the mortgage and be clear of the note. I'd love to be clear of all mortgages some day, imagine the disposable cash available. And lastly to answer the question "Am I missing something here". I answered that in the first paragraph. Your not factoring in risk, which means yes you could have 8-10% increase in your money over a period of 8 years, but you could also risk losing half if not more.
Risk comes from not knowing what you're doing. (Warren Buffet)
Wed Jun 29, 2016 1:27 pm
oldguy Senior Member
Cash: $ 716.00
Joined: 21 May 2006
Brown, what's the house worth? And the loan?
(Your numbers are kinda hard to follow, I think you are mixing Tax & Insurance with the mortgage payments? And switching between 15 and 30 yr loans?)
BTW, some folks are surprised after they pay off their house, ie, the Tax & insurance payments are still there.
IMO, a plan like yours would only work if you have a time frame of 25 years or more. The SP500 fluctuates, it is based on ~40% up years, ~40% down years, and the statistical averaging of the up/downs over many years. Ie, your 8 year plan could be a big loss - or a big gain - but very unlikely to follow any prediction that we would calculate. Big crap shoot.
Your Plan B is much more likely to come close to your probable outcome. But it requires the time span to stick with it. You and Dad would need to tie down the what-ifs in your Wills, what happens when something happens to either/both of you, what grandkids assume control, etc.
A simpler was would be for Dad to invest it in the SP500, let it grow during his lifetime, and Will it as he sees fit. (Of course that might mean that you split with a few syblings/)
Wed Jun 29, 2016 3:25 pm
Brownsfan2k5 Full Member
Cash: $ 20.90
Joined: 27 Feb 2013
Thanks for the responses!
The home is worth like $150,000 but he only owes $80,000 on it. If I were to keep the same payments he has now, I would pay $944 (thats only principal and interest) a month for the next 8 years, and then it would be paid off. If I invested the $80,000 over 8 years at 7% it would equal $137,00. So minus what i paid on the mortgage, it would leave me with $45,000 profit.
Although, if i refinance that $80,000 into a 30 year mortgage my payments would drop to $365 a month (just principal and interest). I then could invest the extra $550 monthly, or $6500 annually into the market as well. After 8 years that 80,000 plus the extra 6500 annually would appreciate to $258,000. Minus the $35,000 i paid on the loan already, and the $61,000 that would still be left on the loan, i would gain a $162,000 profit.
Does that make sense, am i doing the math right? Now all this comes with the hope of a 7% in 8 years, thats the scary part.
Wed Jun 29, 2016 5:12 pm
oldguy Senior Member
Cash: $ 716.00
Joined: 21 May 2006
quote: Now all this comes with the hope of a 7% in 8 years, thats the scary part.
Yeah, that's a high risk - you might get a negative 7%/y for 8 yrs. Or a positive 15%/y for 8 yrs. The outcome is not predictable. Conversely, over a 30-year-block, the SP500 has time to statistically average to about 11%/yr. That outcome is a much better calculation. (The MIL STD 105 sampling plans uses 33 samples as a basis for Normal Single Sampling - and warns that smaller samples adds risk).
Wed Jun 29, 2016 6:19 pm
Cash: $ 2.65
Joined: 15 Aug 2016
Location: Lexington, KY
I wouldn't take the lump sum from him.
Not only could it end bad financially, but you wouldn't want something like that hanging over your head with someone you are close to.
You can give him advice on where to invest it, but don't let him give it to you.