Thread: Break even point for TSP real estate loan?

That would be a really useful tool!

Its more than just the factors you mention...

You also have to consider the opportunity cost of not having your money in the TSP. This can be as high as 15-20% a year it "costs" to take a loan from your TSP. Add to it the cost of repaying the loan in after tax dollars, and the opportunities get slimmer.

The only way that I think the number would agree with this is if either the market is in a serious bear mode like 2001 OR your investment's guaranteed rate of return is extremely high. Im guessing around 30% or so.

The goal would be to do better than average returns (8&#37, not 15-20% returns. Since a mortgage is pretty much for the long term, this is not a completely unreasonable assumption. And even if the markets did average 15-20% returns, the other 50%+ of your account funds that are still in the TSP (the matching funds) would be more than enough to fund your retirement. It's all about risk analysis.

My point was that the money you borrow from your TSP account would need to generate those high rates of returns to compensate for *not* having it in the account.

There may be "good" reasons to do a TSP loan, but I think from a returns perspective youll find that it rarely makes sense.

Ill run the numbers tomorrow, and we can go from there.

Originally Posted by ChemEng

My point was that the money you borrow from your TSP account would need to generate those high rates of returns to compensate for *not* having it in the account.

There may be "good" reasons to do a TSP loan, but I think from a returns perspective youll find that it rarely makes sense.

Ill run the numbers tomorrow, and we can go from there.

Which is all fine and good and we could debate the merits of whether it is a good idea or not to take out a TSP loan for days or months or weeks or years, but that is not the purpose of this thread. That debate is already taking place on countless other threads.
The purpose of this thread is to develop a calculator to determine what the benefit or loss is for taking out a TSP real estate loan, given a certain TSP loan interest rate, given a certain tax bracket, given a certain expected TSP return rate, and given a certain loan amount, a certain mortgage interest rate all as inputs into a calculator.

Heres the spreadsheet I set up to work the problem.

The variables that you can change are highlighted in yellow.

To determine the break even point, use the goalseek function in excel as described in the spreadsheet.

I couldnt remember whether home loans were 10 or 15 year notes, so I ran the simulation for both. (The answer is the same either way.)

Attachment 1768

Thanks for the calculator.

Another thing to add would be to consider if TSP/Mortgage payment is lower than the non-TSP/Mortgage payment, then investing the difference in a taxable account.

Im not tracking what you mean by TSP/Mortgage versus non-TSP/Mortgage. Can you clarify?

TSP/mortgage is the amount that you are paying per month towards the $50000 TSP loan

non-TSP/mortgage is the amount that you would have paid if the $50000 was on your mortgage instead.

For example, let's say the payments to your TSP loan are $400 per month. Your other choice would be to use a conventional mortgage instead of a TSP loan, which let's say are $500 per month. The difference between the 2 is $100 which the disciplined investor would put in a taxable account.

Ok, I wrote a calculator, and the break even point for my scenario above ($50K, 15 years, 15% tax bracket, 8% interest in TSP and taxable account) is a mortgage interest rate of 9.75%. My calculator is rough around the edges, but mathmatically correct. Feel free to clean it up if you want.

Originally Posted by VirginiaBob

Ok, I wrote a calculator, and the break even point for my scenario above ($50K, 15 years, 15% tax bracket, 8% interest in TSP and taxable account) is a mortgage interest rate of 9.75%. My calculator is rough around the edges, but mathmatically correct. Feel free to clean it up if you want.

Im not sure about some things with your spreadsheet, but there must be a fundamental difference in our methodology to yeild such different results.

Just some quick observations:
1. You didnt account for the property tax you would have to pay with the additional property purchase.
2. You also didnt account for the equity accrual in your equation. I would think this would be a big reason for making this choice.
3. Why did you assume only an 8% TSP return? That is awfully low estimate considering the 15 year investment perspective...