If you decide to rent, your monthly rent payment could easily exceed your return on your investment of the proceeds from the sale of your home. Many families are emotionally tied to their homes and will only consider selling as a last resort. For these families, a mortgage or home equity line of credit may be the solution. With these options, you could borrow money based on the value of your home at a cost of the monthly interest paid on the loan. If you decide to borrow against your home, you must consider carefully whether the investment return from the borrowed funds will cover the monthly interest payments and still generate positive growth.
Interest rates are still reasonable and the stock market has been surging.
They combine to create a potentially good opportunity to earn returns larger than the annual interest rate charged on the loan. Investment returns may not be what we hoped for, in which case we would be stuck with a mortgage and little or no investment return to support it. On the other hand, the strategy could pay substantial dividends which is what risk is all about. A slightly different issue, but still along these lines, is whether or not a homeowner should prepay the outstanding balance on an existing mortgage. As you will see in this week's letter, the decision making process is very similar.