[disneysteve]

Originally Posted by humandraydel

Mr. Money has $200k invested in a diversified, tax efficient index fund portfolio. He is about to purchase a $200k home and has asked your advice. He can easily afford the payments on a $200k mortgage. What do you suggest?

A. Liquidate all investments and pay cash for house.
B. Put 20% down and finance 80%.
C. Finance 100%.
D. Put 50% down and finance 50%.

What would be the interest rate on the mortgage?

Just because the portfolio is in tax-efficient funds doesn't mean there wouldn't be tax consequences to liquidating the investments. There would be capital gains to pay for sure so Mr. Money wouldn't net 200K. He would also be left house poor with all of his money tied up in his home, which I wouldn't recommend. So I wouldn't pick A and I would never under any circumstances approve of C.

So what's the difference between B or D and doing a cash-out refi? With option B or D, you are keeping investments you already have and borrowing money to buy a house. With the refi, you are borrowing against your home's value to buy investments you don't already have. Maybe on the bottom line, it works out the same. It just feels very different to me.

I guess what would really decide it for me is if the person needed the investment performance to make the loan payments. If my portfolio crashes, I can still keep up my mortgage payments because they are made from current income. If someone borrowed from their equity to invest and could comfortably afford the loan payments no matter what happened to the investments, I guess there really wouldn't be any difference.