Assume the bank's loan has a 2.6% interest rate. (I know this is historically very low, but even lower is not impossible.)

Assume one has $3000 per month, leftover, after all their expenses and expenditures and that the loan requires about $1000 per month. So the remaining income is $2000/mo.

If they took the $100k (off the top of the home loan) as principle, and invested $2000 per month in mutual funds and index funds for 30 years, they would theoretically make...

  • $1.5M at 3.4% ROR (6%-2.6%)
  • $2.8M at 6.4% ROR (9%-2.6%)

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Is there a major flaw in this back-of-the-envelope calculation?


Is my back-of-the-envelope calculation about taking out a loan to invest into the markets flawed?

Any scheme of borrowing money to "invest" is in fact a gamble and should be avoided. Stick to your own money for investments.

The "gamble" is with money that will effectively be paid off, either way, even if the market takes a dive.

Assume your investment will lose all of its value and you lose your job and need to live off your savings for 6 months to a year while still repaying the debt. (If you think losing its value is unrealistic, then assume the brokerage goes bankrupt and it takes 5 years for them to sort through the mess and finally release your assets back to you).

In that scenario, are you OK?

If yes, then consider the investment.

The answer is yes, unless there is a flaw I did not consider. The existence of an emergency fund in savings (six-months of costs) was a previously tacit assumption.

Pay off half mortgage vs invest in stocks

This will depend greatly on your personal appetite for risk. From a strictly monetary point of view, you'd likely do better by investing in the market (although past performance does not guarantee future results).

2 Answers 2


Being pre-approved for a $300k mortgage does not mean you can borrow that much regardless of what house you buy!

The reason the interest rate is so low is that the loan is secured by the house (and often backstopped by the government). The lender will require an appraisal to ensure the house is worth more than the loan amount (i.e., you have positive equity), so they have a margin of safety to recoup the funds via foreclosure in case you default.

With a mortgage, you can typically only borrow up to 90% or so of the home's value. Anything further would not be a mortgage, but a separate unsecured loan at a higher interest rate.


The lender will have an appraisal done on the home and will only approve a mortgage that is in line with the value determined by that appraisal. Assuming you are paying market value for the home, the lender is not likely to approve a mortgage that is significantly higher than that.

From Can you get a mortgage loan larger than the house amount and buy a car with the remaining loan amount?

It is unlikely the appraisal will be 150% more than the purchased price. So I think the major flaw is the appraisal, and not getting too much over it.

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