Would any of you consider doing something like this?
There is no mortgage on my home. I have a Heloc that years ago was set at prime minus 1 (when they were giving away money). Interest Rate follows the Fed Funds Rate so the interest rate is 2.25%. The HELOC is for $300,000 and we owe about $30,000. Scheduled to be paid off by Dec 2013. Could do it sooner but want (ed) to leave this cheap money source open.
I have no other debt. (Blended family and finances are sort of separate). My own net worth (without my husbands added in) is about 2.5 m . Investable financial assets around 1.25 million and projected to be 1.4 m by the end of 2013.
I want to make my money work for me while not increasing overhead expenses. Don't we all. .
I'm looking at investing in agency REITS that invest in mortgage back securities. I know...I know....but from what I have read there it little credit default risk in the agency REITS with the only real risk being a rise in interest rates. If one is to believe Bernake, it will be 2014 before rates rise. The two agency reits I'm looking at yield 13.5% and 17%. Need to do a bit more due diligence on them but they buy mortgage paper from the GSE's (backed by the federal government) and leverage it. I don't see how the GSE's will never be backed by the Federal Government in the short term.
Because they are REITS, they have to pay 90% of their profit to the shareholders...etc. Current valuation for each is about what it was in 2008 so no real negative value at this time as compared to today. Although NAV can vary 3% to 4% when distributions are paid out. But do I care, if it distributes 13% to 17% every quarter?
It is basically a play on the carry trade.
My question is this. I'm considering taking my entire Heloc of $300,000 and investing it for the 13% to 17%. The collateral is my house. So none of my current financial assets would be in this.
My Heloc interest only payment would be $6,750 a year ($562.5 a month). Projections for the yield from the Reits is $45,000 a year ($3,759 a month but they pay quarterly).
I would also have an eye out for interest rate rises and would get out with the first rate hike.
Pros
- tax deduction for the Heloc. Otherwise I have none.
- Financial assets that can cover some downside (but wouldn't make me happy)
- money has the potential of working harder for me
Cons
- interest rate increases would mean yields on the Reits are reduced but I'd have fair warning.
Am considering doing this in my Scottrade account to eliminate 1% brokerage fee.
What do you guys know about agency REITS? Is this a thumbs up or thumbs down strategy? Am I crazy to consider it?
There is no mortgage on my home. I have a Heloc that years ago was set at prime minus 1 (when they were giving away money). Interest Rate follows the Fed Funds Rate so the interest rate is 2.25%. The HELOC is for $300,000 and we owe about $30,000. Scheduled to be paid off by Dec 2013. Could do it sooner but want (ed) to leave this cheap money source open.
I have no other debt. (Blended family and finances are sort of separate). My own net worth (without my husbands added in) is about 2.5 m . Investable financial assets around 1.25 million and projected to be 1.4 m by the end of 2013.
I want to make my money work for me while not increasing overhead expenses. Don't we all. .
I'm looking at investing in agency REITS that invest in mortgage back securities. I know...I know....but from what I have read there it little credit default risk in the agency REITS with the only real risk being a rise in interest rates. If one is to believe Bernake, it will be 2014 before rates rise. The two agency reits I'm looking at yield 13.5% and 17%. Need to do a bit more due diligence on them but they buy mortgage paper from the GSE's (backed by the federal government) and leverage it. I don't see how the GSE's will never be backed by the Federal Government in the short term.
Because they are REITS, they have to pay 90% of their profit to the shareholders...etc. Current valuation for each is about what it was in 2008 so no real negative value at this time as compared to today. Although NAV can vary 3% to 4% when distributions are paid out. But do I care, if it distributes 13% to 17% every quarter?
It is basically a play on the carry trade.
My question is this. I'm considering taking my entire Heloc of $300,000 and investing it for the 13% to 17%. The collateral is my house. So none of my current financial assets would be in this.
My Heloc interest only payment would be $6,750 a year ($562.5 a month). Projections for the yield from the Reits is $45,000 a year ($3,759 a month but they pay quarterly).
I would also have an eye out for interest rate rises and would get out with the first rate hike.
Pros
- tax deduction for the Heloc. Otherwise I have none.
- Financial assets that can cover some downside (but wouldn't make me happy)
- money has the potential of working harder for me
Cons
- interest rate increases would mean yields on the Reits are reduced but I'd have fair warning.
Am considering doing this in my Scottrade account to eliminate 1% brokerage fee.
What do you guys know about agency REITS? Is this a thumbs up or thumbs down strategy? Am I crazy to consider it?