Cashing out home equity to invest in Mutual Funds

[ADJ]

Before I make any move, I would like your advice. I enjoy this board and really like the spirit of the people on here. Here is the scenario:

I have quite a bit of equity in my primary residence. My current monthly payment (including taxes and insurance) is a little less than 14% of my monthly gross. I would like to refinance and pull out some cash and use that money to invest in index funds. My monthly payment including taxes and insurance would then be about 17% of my monthly gross after refi. I plan to stay in the house for a while and I wouldn't need the money in the market for at least 8 years. In fact, my plan is to never draw down my principal but to build up my portfolio to the point where I would need only a small SWR. I am in my late thirties and have a retirement plan at work in addition to a 401k plan. My assets are split about evenly between real estate (including some rentals), mutual funds and a little ETFs.

 

[Darryl]

What is your current interest rate and how many months do you have left to pay? What would your new interest rate be? What closing costs will you have to pay? Would the refi payoff on the same date as the original loan? Do you picture yourself keeping this home after you retire? How much money would you walk away from the refi with to invest? What is the Real Estate market like in your area are homes still appreciating? Is the trend forecasted to continue?

My first reaction to your question is don't do it. You have a very manageable debt load with this mortgage so if you're not carrying any personal debt just use your excellent cash flow to DCA into your new postion. If you think you still want to do this some of the questions you should consider are the ones above.

 

[Peaceful_Warrior]

From an asset building perspective, I am heavily leaning towards getting an interest-only mortgage on my next place, and just investing the difference. Of course that depends if I can get 30 yr fixed interest-only, or the more commonly available 10yr fixed.

Otherwise I'll lean towards either 30 or 40 yr, depending on the difference in the payment.

As for your actual question, I would be disinclined to take equity from the home to invest in anything that wasn't fixed at a rate that made it advantageous to leverage that debt.

So if your equities will give enough dividends to make that spread, then I'd consider it. Also if you can handle the mortgage payments even if you have 10-15 down years then it's worth considering if you assume your rate of return is going to be better than what you get from either debt paydown or investing in fixed income assets.

 

[haha]

I consider the OP's question a good hint that at this time it would likely be a terrible idea.

ha

 

[Mwsinron]

I consider the OP's question a good hint that at this time it would likely be a terrible idea.

ha

Gives the impression to me people are getting gutsy..

 

[REWahoo]

Who knows what the future holds, but with the market nearing an all time high and home values declining, this might not be the optimal time to do this. But heck, nothing ventured....

 

[haha]

But heck, nothing ventured....

Nothing lost?

 

[megacorp-firee]

Nothing lost?

... and look both ways before crossing.

 

[73ss454]

Well I'm positive that I would have no idea what to do.

 

[kumquat]

Listen to Darryl.

 

[al_bundy]

heloc is going to run 6% to 7%. Vanguard SP500 fund is 11.5% or so over the last 30 years. if you have a really long term perspective and willing to take on short term risk, go for it

 

[mb]

It is not something that I would do but my suggestion is to take a look and see if you can simulate it with FIRECALC. Look at the resulting distribution with particular attention to the 10 or 20% worst case scenarios and think seriously how it would affect you if one of those scenarios became reality. If you are ok with that then go for it.

MB

 

[haha]

heloc is going to run 6% to 7%.

Doesn't this float?

ha

 

[Nords]

Who knows what the future holds, but with the market nearing an all time high and home values declining, this might not be the optimal time to do this. But heck, nothing ventured....

This is just the harbinger of a market top.

We'll know it's here when people start maxing out their credit cards to by QQQs.

 

[Olav23]

Has anyone read the Black Swan ban Taleb? Not trying to hijack, but this sorta reminds me of over-optimism and over-confidence about which he speaks.

 

[Mwsinron]

I got a bit worried the other day. DW and I were driving with the MIL in the back. Out of the blue she goes " Oh did you all hear about the stock market making a new record!" My MIL has no investments that we know of

 

[haha]

This is just the harbinger of a market top.

Nords? Have you been channeled by Grantham?
Ha

 

[tryan]

heloc is going to run 6% to 7%.

Not any more .... you're looking at 8% (I've got one). Home equity lines track short term rates ... which have been rising.

A while back I saw some fixed lines running 6-7% but I believe thier gone.

Regardless (6,7,8%) using home equity to invest in stocks is like buying on margin. Tread carefully (I wouldn't do it).

 

[donheff]

Am I correct to believe that if you take equity out and don't invest it in capital improvements it is technically not deductible?

 

[Zathras]

You have great cash flow, go with a straight investment. Just a bit each month directly into the funds you want.
If you take a HELOC you are essentially paying a 7% or 8% fee on top of any fees the fund charges you. Sounds like a great way to make money for everyone other than yourself

 

[Andre1969]

I took out an HELOC back in early 2005, and ended up investing most of it. I've made out pretty well so far. However, back then, the rate for the HELOC was only 5.5%. Today it's 8.5%. The investments, mainly some stocks bought through Scottrade and mutual funds in Janus and American Century, have averaged more like 15-20% in that timeframe. However, the past two years have also been very good to the stock market, and who's to say that's going to last?

I originally borrowed $75K, but then took out another $25K, for a total of $100K. While the rate was low, I was just rounding the interest rate up to the next higher $100, and paying that. So if the interest payment for a given month was $603, I'd pay $700. Now that the rate has shot up, I've paid it down to $75K. Interest is running about $530 per month, but I'm paying it down fast, writing the checks for $1000 per month. I figure it should be paid off in just under 9 years.

Oh, one other reason I took out the HELOC was for the writeoff. I know it doesn't make sense to pay a buck just to get back 25 cents, but on top of that, I get to write off charitable deductions, property tax, state/local tax, etc, and the HELOC helps to keep me out of the 25% federal tax bracket.

I think in certain situations, it can be profitable to take out an HELOC and invest the money. Like when the rates are low and stocks/mutual funds are doing well. I happened to luck out and do it at a good time. However, I don't think I'd do it today, with the higher HELOC rates these days, plus the run-up in the market that can't go on forever...

 

[tryan]

.... that's a good point, if you have the cash flow to pay some lender for a HELOC then DCA into the market INSTEAD of borrowing against the house and LUMP summing into the market at all time highs.

 

[al_bundy]

i don't think it's the all time highs OP needs to be scared of since the market had to set a lot of all time highs in the last 25 years of the bull market that ended in 2000. i'd be more afraid that we are a few years into the business cycle and there is a higher risk of a bear market now than a few years ago even if we get past it in a few years.

go look at charts of 1997 - 2000, 1987 -1990 and so on of year 7 of the decade through year 0 of the next decade going back 100 years or so. most times the last 2-3 years of the decade are very poor returns or just a break even from year 7.

i'm not going to look again, but i think only the 1920's, 1950's and 1990's had the last 2-3 years of the decade positive returns from stocks.

 

[jav]

I must be super conservative but I struggle to justify the risk versus reward on this. Past averages are great but not guaranteed. The fact remains that the interest rate on a HELOC (variable or fixed) will be positive in perpetuity. It's also a fact that while historical market averages are positive, there are groups of years where depending on buy-in date, your returns could be negative and bite into principle. Once you go negative, (and I have had the misfortune in the not to distant past), it can take years of positve returns just to get back to even.... all the while, you get no such break on your Heloc payments.

 

[Andre1969]

One other thing I should point out, I guess, is that I didn't have a mortgage on my house before the HELOC. If I was already paying on a mortgage, there's no way I would've taken out an HELOC on top of that!

Looking back, I probably should have just locked into a regular 30 year mortgage. However, the lender paid the closing costs on the HELOC, and did not require an appraisal, so I probably saved about $2-3,000+ up front. I'm paying for it now, with the higher interest, but at only two years and a couple months into the HELOC, I'm sure I'm still not at the breakeven point yet with regards to up front costs versus increased interest.