Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Has anybody taken home equity to invest
Old 01-24-2011, 10:42 AM   #1
Recycles dryer sheets
 
Join Date: Oct 2009
Posts: 58
Has anybody taken home equity to invest

Mortgage rates are at all time lows, no news there. I have 100% equity in my house and can easily get 250k out without much effort at 3.99 10 years no closing costs. Obviously, if I beat a return of 3.99 I did ok. The mental "return" of knowing my house is paid for is worth quite a bit to me however. I keep thinking though that I am missing an opportunity at these interest rates.

Age 44, retiring hopefully at age 51. Has anyone here done this?
__________________

__________________
floatingdoc is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-24-2011, 11:35 AM   #2
Recycles dryer sheets
 
Join Date: Aug 2009
Location: westerville
Posts: 242
I have not personally done this however I do know some who did during the last recession. Got in in 03 and out in 05 and did quite well and was retired at the time however his situation was as follows:
Timed market right and bought close to the bottom watched it grow 25-30% and got out quickly.
his retirement pension income covered expenses including new payment.
Took out fixed rate in case of long term wait for market recovery.
Had plenty of other assets to pay off debt if he choose to.
Bought individual high yielding dividend stocks

So for this person if the went bad it would not impact retirement style of living.

I thought about doing this however for me if market went south so would my early retirement plan and I was not willing to risk ER.
__________________

__________________
Trawler is offline   Reply With Quote
Old 01-24-2011, 11:42 AM   #3
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
We (and every other financial forum) saw much discussion of this topic prior to the great recession. The question typically posted was... If I have some extra money should I pay down the mortgage or invest in the markets. We saw eliborate postings giving historical returns of the equity market making it appear to be a sure thing.

(FAQ archive) Should I pay off the mortgage or invest the money?

One could make a case that if the markets do better (tax adjusted) than your (tax adjusted) mortgage that you would come out ahead. perhaps way ahead.

It goes without saying though, that you are taking on much more risk. You might ask yourself though... What is the downside if I am wrong ? What if I lose my job ?Do I then have to live in my car ?
__________________
MasterBlaster is offline   Reply With Quote
Old 01-24-2011, 11:44 AM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 13,275
Had a BIL do it... he also did the zero interest credit cards... he passed and it took my sister 3 years to pay off the CCs... she does not want to pay off the mortgage as it would be half her savings..

Her saving grace is she gets a pension that covers 100% of her expenses and did not need the savings...

Funny, we talked about it last week and I said that her 'net' savings was X... she is OK with that...

It was a flaw with BIL.. if he had $1 mill in cash because he went $1 mill into debt.. he would say 'I got a million dollars'....
__________________
Texas Proud is offline   Reply With Quote
Old 01-24-2011, 11:46 AM   #5
Recycles dryer sheets
 
Join Date: Oct 2009
Posts: 58
That was my feeling also trawler, that is why I have not pulled the trigger. I think firecalc has me safely retiring 52
__________________
floatingdoc is offline   Reply With Quote
Old 01-24-2011, 12:54 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
I borrowed a chunk of money on a HELOC in late 2008 and bought investment grade bonds trading at double digit yields. I eventually sold off the bonds as they reached par (and 5% yields) and paid off the loan.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 01-24-2011, 01:31 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
I have not done it, but the hurdle rate (~4%) does seem low enough to justify the risk. I worry, though, that the low interest rates may reflect low risk premium generally, so maybe it isn't the slam dunk it first appears to be.

I could do the same trade, but won't. My views on risk have evolved. For me it's no longer simply a question of risk tolerance (which historically has been quite high in my case) but more importantly about proximity to financial goals. If I don't need to take more financial risk to reach my goals, why should I, even if I think I could "tolerate" the downside? Right now I'm shedding risk in a rising market. I'll consider adding risk if risk premiums return in a meaningful way.
__________________
Retired early, traveling perpetually.
Gone4Good is offline   Reply With Quote
Old 01-24-2011, 01:42 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,385
Quote:
Originally Posted by Gone4Good View Post
I worry, though, that the low interest rates may reflect low risk premium generally, so maybe it isn't the slam dunk it first appears to be.
If CAPM isn't total fantasy, this has to be true.
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Old 01-24-2011, 01:43 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
I did it with a HELOC from late 2001, paid it back in 2006 and made a little. Did it again in 2008 and a cash out mortgage refi in mid 2009. The second time worked great. Made about 90% on the HELOC borrowed money. Paid back most of the HELOC a month ago since I'm building cash at this time and that's a good place to "store" it. Invested in all equities each time. The HELOC interest rate varied from 2.5% (now) to maybe 5% when I gave up the first time. The mortgage rate is fixed 30 year at 4.375%. If I can't do better than that in equites over 30 years many of us will have problems.
__________________
Animorph is offline   Reply With Quote
Old 01-24-2011, 01:44 PM   #10
gone traveling
 
Join Date: May 2008
Posts: 3,864
It's the old risk vs. reward question.

If you are comfortable with the risk (in this case potentially losing your family home) then pursue the reward.

I've used HELOC's about a dozen times in the past to invest in Real Estate, build second homes, etc- but never to invest in the market; just my own comfort zone, not a fear that one investment vehicle was inherently riskier than another. (My rationale was that it all went to sh*t, I could always go live in the investment home) All but one of these transactions worked out very well, but I was fully prepared when I signed those big HELOC checks that it could just as easily go the other way. I have a fairly high tolerance for risk, but self-mitigate by keeping the amounts manageable.

Good luck and keep us posted.
__________________
Westernskies is offline   Reply With Quote
Old 01-24-2011, 02:11 PM   #11
Dryer sheet aficionado
 
Join Date: May 2008
Posts: 47
My parents used their cheap home equity to buy a couple rental properties with cash. The properties rented out pretty quickly and they're making around 10% on their equity. It took them a while to look at and research all the properties , though, so it's still work, but for them it is worthwhile.
__________________
xynny is offline   Reply With Quote
Old 01-24-2011, 02:49 PM   #12
Thinks s/he gets paid by the post
veremchuka's Avatar
 
Join Date: Oct 2010
Location: irradiated - too close to the nuclear furnace
Posts: 1,294
if you can buy cds that yield > 3.99% + the taxes you'll pay on the profits + the interest you'll pay on the loan - loan tax deductibility, if you put it into equities what if you loose $100k? what if bonds drop in price? sounds like you are close to retiring and iirc you once said you don't have investments in the markets just cds. seems to me you are putting a ton of risk in your life when you really don't need it. if you can time when to buy and sell equities you'll make a fortune and you only have to be right twice.
__________________
veremchuka is offline   Reply With Quote
Old 01-24-2011, 03:20 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Quote:
Originally Posted by veremchuka View Post
what if bonds drop in price?
I didn't care. I piced individual bonds that I could do credit work on (underwrite, in effect) and made sure that the bonds would mature before the HELOC was due. So if I had to hold to maturity I was fine, absent defaults.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 01-24-2011, 03:38 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Quote:
Originally Posted by brewer12345 View Post
I didn't care. I piced individual bonds that I could do credit work on (underwrite, in effect) and made sure that the bonds would mature before the HELOC was due. So if I had to hold to maturity I was fine, absent defaults.
Yeah, there were some fat pitches out there. I recall some 2 year, single-A, utility operating company, floating rate bonds trading at nearly LIBOR+1,000, while HELOC rates were like LIBOR+300 or so (maybe less, I forget). I didn't have a HELOC already, and no way to get one in late 2008/early 2009, but I know some folks who put on a lot of those trades.
__________________
Retired early, traveling perpetually.
Gone4Good is offline   Reply With Quote
Old 01-24-2011, 04:26 PM   #15
Recycles dryer sheets
 
Join Date: Dec 2006
Posts: 182
In '06 and '07, I funded a relatively small SIMPLE IRA from a HELOC, rather than have to dig up other funds. I bought some fixed-income investments that I still have. I have never paid off the HELOC due to the extremely low rate. I have not done it since and I will likely pay the LOC off at some point when rates go up to an uncomfortable level. In the meantime, there's a good spread between the income from the investment and the loan expense.

Having said that, there was a point back a couple years ago when this looked like a pretty stupid idea. In retrospect, I'd not do it again. For a generally conservative investor, doing this just doesn't fit the profile. Again, this was not a huge amount of money, so pretty low risk.
__________________
lowflyer is offline   Reply With Quote
Old 01-24-2011, 05:14 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Quote:
Originally Posted by Gone4Good View Post
Yeah, there were some fat pitches out there. I recall some 2 year, single-A, utility operating company, floating rate bonds trading at nearly LIBOR+1,000, while HELOC rates were like LIBOR+300 or so (maybe less, I forget). I didn't have a HELOC already, and no way to get one in late 2008/early 2009, but I know some folks who put on a lot of those trades.
I was buying 5 year BBB and A corporates at 12 to 15% ytm and financing with a heloc at prime minus 50 BP.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 01-24-2011, 05:21 PM   #17
Thinks s/he gets paid by the post
73ss454's Avatar
 
Join Date: Oct 2004
Location: LaLa Land
Posts: 4,378
If I tried this technique I know exactly what would happen, that's why I don't do it.
__________________
73ss454 is offline   Reply With Quote
Old 01-24-2011, 06:12 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Quote:
Originally Posted by brewer12345 View Post
I was buying 5 year BBB and A corporates at 12 to 15% ytm and financing with a heloc at prime minus 50 BP.
Ahh, the good old days.
__________________
Retired early, traveling perpetually.
Gone4Good is offline   Reply With Quote
Old 01-24-2011, 07:27 PM   #19
Recycles dryer sheets
 
Join Date: Apr 2010
Location: Silicon Valley
Posts: 198
Used HELOC to buy 2 REOs in 2009...100% financed. Sold one - made about $45k; kept the other - it contributes $700/month above interest, insurance and property taxes (maintenance v.small as new roof).

HELOC is variable interest rate so will use it to enter another fixer upper, but will want to refinance for long term.

Although I have improved from zero value dotbombs to last 3 purchases making (JAVA, CIT and C) significant % play money gains, I don't think I will live long enough for me to improve enough to leverage my stock judgement.
__________________
SVHoper is offline   Reply With Quote
Old 01-24-2011, 07:55 PM   #20
Thinks s/he gets paid by the post
 
Join Date: Sep 2009
Location: Hong Kong
Posts: 1,575
I took out a bigger mortgage against our home to finance my capital contribution to my firm in early 2009 rather than sell some of my equities. So far it has been a very good decision.

I'd be happy to do it again in the right circumstances and for the right investment (i.e. when the market has tanked and decent assets are going cheap), but I wouldn't do it now.
__________________

__________________
Budgeting is a skill practised by people who are bad at politics.
traineeinvestor is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Cashing out home equity to invest in Mutual Funds ADJ FIRE and Money 83 05-10-2007 01:16 PM
Advice....Should I look at home equity this way? ijuba FIRE and Money 65 02-11-2007 09:37 AM
Can you invest in a private equity/VC fund? Olav23 FIRE and Money 4 01-10-2007 06:48 AM
home or invest coolwave Young Dreamers 8 09-12-2006 10:58 PM
Invest your home equity? dimwit FIRE and Money 6 08-16-2005 06:14 PM

 

 
All times are GMT -6. The time now is 10:21 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.