How do you use your HELOC?

[rw86347]

Originally Posted by Financial Jungle Guy

Can you elaborate? Which one is risky? The stocks, the loan or both?

I figure it cannot be the stocks, since you are prepared to buy them in the future. The stock market doesn’t become safer a couple of decades from now. In fact, it’s safer to buy them now with time is on your side.

It can’t be the loan either, if the dividends cover the after-tax interests. Basically you let dividend increases propel your retirement cash flow. The earlier you start, the more time you have to compound.

Don't get me wrong. I'm not trying to persuade people to leverage if they don't feel comfortable.

Loosing cash is sad. Loosing loaned money is a disaster. I have learned the hard way that borrowing for an investment exponentially increases risk. If your math is off more than 10% it will prevent you from future saving. The risk isn't worth it, just use plain old cash.

You are much better off lowering you debt load and investing with pure cash. Which is really at the heart of the LBYM concept.

[Financial Jungle Guy]

Based on your reply, I think we're talking about different frame of minds. I'm looking at it from a cash flow point of view, and how it'll increase over time to fund my retirement. If the underlaying securities drop 10%, it doesn't affect cash flow. It may be sad to some people, but it's pure psychological and can be corrected through education. If you're going invest $10k each year for the next 20 years to buy dividend paying stocks, having the stocks correct 10% means you can buy even more shares next time, and increase your cash flow.

[Nords]

Originally Posted by Financial Jungle Guy

It may be sad to some people, but it's pure psychological and can be corrected through education.

(*snork*) That's pretty funny!

I don't think an emotional preference can be corrected by quoting research, statistics, or data. Otherwise we'd all be at our ideal weights, live in harmony with the environment, be happily engaged in our avocations, and be invested in low-cost index funds with 0% turnover...

One reason that we've chosen to leverage our portfolio with a mortgage is because we're more afraid of losing to inflation than we are of losing our home. When enough factors line up in favor of one's emotional bias then it's easier to go ahead with the decision. When an emotional bias is still against the facts, though, it's almost impossible to change.

[Financial Jungle Guy]

I could not have said it better.

It's my fault for not being clear. I was referring to behaviour science, which has been documented extensively. The more we now how our brain works, the equipped we're in keeping our emotions in check.

It's my belief that investors make money with tough mentalities, not smarts.

[JustCurious]

My mortgage balance is currently about 36% of my home's market value, and I have a 15 year fixed at 5.25 which I am paying extra on each payment, and I expect to have it paid off in about 5-6 years. I am very opposed to having debt, and I am even more strongly opposed to having debt which is collateralized by my home. I.E., if I don't pay the debt, they can take my home. So for me, no HELOC of any kind, thank you very much.

[Financial Jungle Guy]

Originally Posted by JustCurious

I am even more strongly opposed to having debt which is collateralized by my home. I.E., if I don't pay the debt, they can take my home.

If your home is not creditor proofed, they can take your home even if the debt isn't collateralized by your home. I think (correct me if I'm wrong) having the debt collateralized by your home simply means this particular lender is given the first dip at your home before other lenders.

Having said all that, leveraging is a very sensitive topic, and I can understand why people are resisting the idea. Investing with cash is never a bad option if people are uncomfortable with investment debts.

[JustCurious]

Originally Posted by Financial Jungle Guy

If your home is not creditor proofed, they can take your home even if the debt isn't collateralized by your home. I think (correct me if I'm wrong) having the debt collateralized by your home simply means this particular lender is given the first dip at your home before other lenders.

I will correct you because you are wrong. It depends on which state your home is located, but in some states like mine (Florida) your home is protected from all creditors, with the obvious exception of those creditors who have a collateral interest in your property (ie a mortgage).

[Financial Jungle Guy]

Originally Posted by JustCurious

It depends on which state your home is located, but in some states like mine (Florida) your home is protected from all creditors

Fair enough. I'm from Canada, that's why I hesitated.