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Pay off equity line or invest?
Old 12-14-2011, 03:18 PM   #1
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Pay off equity line or invest?

Just sold an investment property and the proceeds are approximately that of my only debt, a 300,000 dollar equity line. The cost of carrying the equity line is about 7k in interest and about 3 thousand in required wind and flood insurance. If I paid off the line I would drop the wind and flood as my home is basically worth the lot value. I plan on retiring in 4 years tops. If I don't pay it off now, my plan would be to pay it off when I sell my business, also worth about 300k. I would like to hear some thoughts from this group.
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Old 12-14-2011, 03:29 PM   #2
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If you owned your home free and clear, would you take out a $300K home equity line in order to invest?

Same question, different direction. Either way you have $300K debt and an extra $300K in investments, or you have no debt and you don't have the $300K in extra investments.

The interesting thing is that stating this same question in two different ways often leads people to contradicting decisions.

Just food for thought and another way to look at it.
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Old 12-14-2011, 05:22 PM   #3
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Quote:
Originally Posted by ziggy29
If you owned your home free and clear, would you take out a $300K home equity line in order to invest?

Same question, different direction. Either way you have $300K debt and an extra $300K in investments, or you have no debt and you don't have the $300K in extra investments.

The interesting thing is that stating this same question in two different ways often leads people to contradicting decisions.

Just food for thought and another way to look at it.
Great point. I have in the past, which is why I have the equity line in the first place. But I'm getting a little tired of the risk taking on margin. I think it's time to put the gun in the holster. Thanks for the perspective.
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Old 12-14-2011, 07:04 PM   #4
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gatordoc, i am right with you about being tired of the risktaking on the margin. i have also got a home equity loan that i use for investments. lately the markets have been so disappointing that i have waffled back and forth on the idea of paying it off and as you say so eloquently, put the gun in the holster. you have given me food for thought.
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Old 12-14-2011, 08:22 PM   #5
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I think it depends on your risk appetite and if you invested the 300k whether you would generate a return that exceeds the cost of the equity line. Sounds like the cost is about 3.3% (7 interest + 3 insurance)/300.

If you are confident your investment return will exceed that cost then in theory you should invest. However, for some people the potential gain isn't worth the risk and they sleep much better at night having no debt.
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Old 12-14-2011, 09:46 PM   #6
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Complicated by the 4 year time limit too. Still, I think my usual portfolio will clear 3.33% across the next 4 years. Probably not in 2012 though.
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Old 12-14-2011, 09:49 PM   #7
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All very valid points. Peace of mind at being debt free on entering ER should be worth something too. Personally, I would retire the debt ASAP.
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Old 12-14-2011, 10:07 PM   #8
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All very valid points. Peace of mind at being debt free on entering ER should be worth something too. Personally, I would retire the debt ASAP.
+1

You have to clear more than 3.3% after tax, so why risk it for a mere 4 years.
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