Last month our credit union (Navy Federal) gleefully processed our mortgage refinance. Today they've followed up with an offer of a zero-cost HELOC on the remaining equity. Apparently smelling blood in the water, they're using our refinance application to express-mail a new contract and they'll even send the notary to our house. Amazing.
Of course this lunch isn't totally free. Once we get the checkbook in our hot little hands, the HELOC draw period is good for up to 10 years. After 10 years the draw stops and any remaining balance is paid off at an interest rate to be negotiated at that time. For the first six months after closing, interest rate on any balance is 1.9%. (This teaser rate expires six months after closing whether we've written a check or not.) After six months the balance's rate rises to [prime + 0%] for the life of the draw. Today's prime is 4.75%.
As TH has pointed out many times, this type of zero-cost HELOC is a great emergency fund that frees up money-market cash for longer deposit terms. It also makes it easy to jump on good deals for home-improvement materials from the classifieds. But we don't have any specific use for the money and it'd just be smoldering in our pockets.
Arbitrage is another idea. While I wouldn't put up $57K on margin to short Google's stock, I'd certainly be happy to stash it six months for >1.9% and then indefinitely for anything over prime (which unfortunately is a variable rate). Since we'd be able to deduct the HELOC interest, our bracket's after-tax rate to beat is 1.62% (for six months) and then 85% of the variable rate (or 4.05% today). The only "problem" is finding anything that high at Bankrate.com or NFCU. Bankrate's highest six-month CD would net about $80 profit (assuming it was actually available). INGdirect's Orange Savings account is 2.2%, which would net about $160 in six months (but who knows what fees they'd charge for a $57K hit & run). NFCU offers a competitive interest rate on a four-year CD but the arb profits only come out to $90/year-- and that's only if interest rates don't rise.
So, while this remains a great emergency fund, does anyone else have any creative ideas?
Of course this lunch isn't totally free. Once we get the checkbook in our hot little hands, the HELOC draw period is good for up to 10 years. After 10 years the draw stops and any remaining balance is paid off at an interest rate to be negotiated at that time. For the first six months after closing, interest rate on any balance is 1.9%. (This teaser rate expires six months after closing whether we've written a check or not.) After six months the balance's rate rises to [prime + 0%] for the life of the draw. Today's prime is 4.75%.
As TH has pointed out many times, this type of zero-cost HELOC is a great emergency fund that frees up money-market cash for longer deposit terms. It also makes it easy to jump on good deals for home-improvement materials from the classifieds. But we don't have any specific use for the money and it'd just be smoldering in our pockets.
Arbitrage is another idea. While I wouldn't put up $57K on margin to short Google's stock, I'd certainly be happy to stash it six months for >1.9% and then indefinitely for anything over prime (which unfortunately is a variable rate). Since we'd be able to deduct the HELOC interest, our bracket's after-tax rate to beat is 1.62% (for six months) and then 85% of the variable rate (or 4.05% today). The only "problem" is finding anything that high at Bankrate.com or NFCU. Bankrate's highest six-month CD would net about $80 profit (assuming it was actually available). INGdirect's Orange Savings account is 2.2%, which would net about $160 in six months (but who knows what fees they'd charge for a $57K hit & run). NFCU offers a competitive interest rate on a four-year CD but the arb profits only come out to $90/year-- and that's only if interest rates don't rise.
So, while this remains a great emergency fund, does anyone else have any creative ideas?
