Leveraging a Heloc to buy stocks - Is this a bad idea?

[kgtest]

I don't have a crystal ball, so maybe the markets decline during a recession that might be in the near future puts an inherent risk out there with my question, but is it a good time/and idea to leverage a HELOC to invest in the stock market?

Current 10yr HELOC is ~5.5%

Obviously I would have to consistently beat that 5.5% annual rate...or maybe look at it more in a monthly rate of .46% each month, to pay the loan back without a loss of principle.

Obviously I could take out money to repay the loan during good months (Sell high) to cover the loan repayments or, I could just leverage future earnings betting on my own income producing abilities to repay the loan payment with new income; (assuming I can beat 5.5% annual salary + inflation) this would be another winning strategy.

Worst case scenario, we experience a very long 10 yr bear market where returns don't beat the 5.5% interest rate, then I would have lost the "bet".

Has anyone ever considered doing this (or actually done this) in a down market to catch the ride up a little quicker? I've read some various articles and viewpoints on the internet about this and most author's recognize doing this strategy in a rising stock market would yield the highest probability of success.

So again, going back to my crystal ball,who the heck knows what the market is going to do, but I do know my earning power seems to be rising quite nicely. I don't know how much control I have on those 2 variables so maybe its not much of a strategy, as it is a bet against the future.

 

[jazz4cash]

I’ll say it’s an AWFUL idea unless you are talking about a tiny sliver of your equity. It’s leveraged market timing. HELOCs are generally variable rate products so your hurdle rate could change. What index, margin, and caps does this HELOC use? How often does it adjust. An HEL (Home Equity Loan that is fixed rate and non-revolving) might be a better choice (but still AWFUL).

 

[kgtest]

I’ll say it’s an AWFUL idea unless you are talking about a tiny sliver of your equity. It’s leveraged market timing. HELOCs are generally variable rate products so your hurdle rate could change. What index, margin, and caps does this HELOC use? How often does it adjust. An HEL (Home Equity Loan that is fixed rate and non-revolving) might be a better choice (but still AWFUL).

Got it! An awful use!

 

[Bigdawg]

I get what you are trying to do. The market is down so logically it SHOULD EVENTUALLY go back up. You are only 41 and want to retire at 50 (2031). In theory it SHOULD work. But, most here (or anywhere) whould advocate this strategy as too risky. The market SHOULD be up between now and 2031. In 9 years you will only be 50 so you could work a few more years to recover. IF I was going to use your plan, I would only do it with small amounts of $. If you are going into a S&P 500 fund I'm guessing you will break at least even. With 9 years to go on your plan I would just stick with it and invest any raises, bonuses, etc... Good luck.

 

[COcheesehead]

Many say to expect forward equity returns to be 5%. At that rate you’d only lose .5% a year.

 

[kgtest]

Many say to expect forward equity returns to be 5%. At that rate you’d only lose .5% a year.

Fair enough!

 

[kgtest]

I get what you are trying to do. The market is down so logically it SHOULD EVENTUALLY go back up. You are only 41 and want to retire at 50 (2031). In theory it SHOULD work. But, most here (or anywhere) whould advocate this strategy as too risky. The market SHOULD be up between now and 2031. In 9 years you will only be 50 so you could work a few more years to recover. IF I was going to use your plan, I would only do it with small amounts of $. If you are going into a S&P 500 fund I'm guessing you will break at least even. With 9 years to go on your plan I would just stick with it and invest any raises, bonuses, etc... Good luck.

Yeah, I like the idea of just plowing new earned income into the market, and not spending it. It accomplishes the same thing, with less risk and leverage,and of course less reward as the riskier HELOC deal.

I suppose maybe it isn't a bad idea to consider SOME heloc on the plan, to lower the risk. I have about 300k of equity so maybe take 20% of that or 60k and use the HELOC strategy. It would get me closer to the goal post sooner if my strategy works out...and just a year or two of extra work if it doesn't. I could live with that if I had to work longer...and if the strategy works out... yay for me!

 

[pb4uski]

I think a better and less risky play would be to buy long-dated LEAP calls on equities.

See https://www.optionseducation.org/strategies/all-strategies/synthetic-long-stock

 

[jazz4cash]

Yeah, I like the idea of just plowing new earned income into the market, and not spending it. It accomplishes the same thing, with less risk and leverage,and of course less reward as the riskier HELOC deal.



I suppose maybe it isn't a bad idea to consider SOME heloc on the plan, to lower the risk. I have about 300k of equity so maybe take 20% of that or 60k and use the HELOC strategy. It would get me closer to the goal post sooner if my strategy works out...and just a year or two of extra work if it doesn't. I could live with that if I had to work longer...and if the strategy works out... yay for me!

I don’t understand your insistence on using HELOC vs HEL. I think a fixed rate HEL would lower your risk substantially vs. a variable rate HELOC. Unless you are planning to be an active trader I don’T see why you need the flexibility of a HELOC. Take a look at both loan types. My idea of a tiny sliver of your equity is 10% max (30k).

 

[38Chevy454]

It's an extreme market timing move. As long as we're on the high risk path, forget stocks, invest in bitcoin or other cryptocurrency. Go big or go home.

^^^^^ Above is sarcasm. I don't think you or anyone should risk home equity based on market timing.

 

[Sunset]

I did it in a previous recession.

It took about 5 years before I cashed out, but after repaying the debt and interest, I was left with ~70% profit on this extra money.

I didn't do it this time, as I was too slow to lock in 2.5% interest AND I don't think the market has fallen enough from it's incredible high, and I feel this past high was relatively higher than in past times.

Or maybe I'm just old and chicken....

 

[gcgang]

Go big or go broke, eh?

At least the loan won’t require more cash to be put in if the equities decline, like a margin loan.

But you won’t be able to legally deduct the interest on the HELOC. https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law

 

[arcyallen]

I know it's tempting, but it may be riskier than it seems. Leverage works EXCELLENTLY...until it blows up. If anything, I'd be selling things around the house (expensive cars, extra stuff, etc) and investing the proceeds. I told my wife if the market dropped by half I'd likely sell my convertible and pinball machines and invest the money. No leverage required! But for you...if it were at 2-3%, I'd recommend against it but I'd understand if you did. At 5%+, no way.

 

[Fermion]

You could buy Ibonds paying 8% I guess...

 

[Vacation4us]

I know way to many should be retired people who used their house like a piggy back. No way in h*** would I recommend what your contemplating. It’s a very very bad no good plan.

 

[MarieIG]

IMHO, leveraging the family home, i.e. the roof over my children and spouse's head, to buy stocks, is not a good plan.

You mention a good income, so I'm not sure why you don't already have some dry powder for this very purpose. Presumably you have a good rate on your primary mortgage which freed up some of your earnings? Also, it could be argued that the equity in the home provides a certain diversification of assets.

Personally, after funding an emergency fund, life insurance, disability insurance, I would cash flow some of that good income into the market. It is not just a matter of potentially working a year longer. It's being flexible if a situation beyond your control impacts your or your spouse's ability to earn.

 

[copyright1997reloaded]

I have a friend who was essentially wiped out in the 1987 crash due to margin.

PRESERVATION OF CAPITAL is job one.

 

[NW-Bound]

I think a better and less risky play would be to buy long-dated LEAP calls on equities.

See https://www.optionseducation.org/strategies/all-strategies/synthetic-long-stock

Or one could buy 3x leveraged ETFs, such as SPXL.

By not borrowing money, you cannot lose more than what you have.

PS. If the above 3x leveraged S&P is not volatile enough for you, do 3x leveraged Nasdaq. Just trade 100 shares in/out of market and see if you can make money.

 

[Bigdawg]

One strategy I have used twice is the 0% credit card. What I do is get a 30k limit CC for 18 months. I put everything that I can on that card. I take the money that I would typically spend on gas/groceries/eating out/vacations/etc... and put it in the market. So basically instead of dropping the typical 2-3k/mo into the market I am now dropping 4-6K into the market. I do this for 15-16 months (the whole time having 20-30K cash in a money market) then reevaluate. At that time I will either pay off the balance (that's what I've done in the past) or transfer to another card. I would never carry a balance higher than the $ I had sitting in the money market account.

 

[MarieIG]

One strategy I have used twice is the 0% credit card. What I do is get a 30k limit CC for 18 months. I put everything that I can on that card. I take the money that I would typically spend on gas/groceries/eating out/vacations/etc... and put it in the market. So basically instead of dropping the typical 2-3k/mo into the market I am now dropping 4-6K into the market. I do this for 15-16 months (the whole time having 20-30K cash in a money market) then reevaluate. At that time I will either pay off the balance (that's what I've done in the past) or transfer to another card. I would never carry a balance higher than the $ I had sitting in the money market account.

Nice!

 

[Montecfo]

Its a bad idea. Reminds me of that "Bad Idea Jeans" spoof commercial on Saturday Night Live.

"Sure, It was a little aggressive. But everyone knows that given a little time, markets always rally, and besides whose idea was it to make these loans variable rate??"

 

[Bdarr]

risk and reward

I have known a many successful investors and many unsuccessful ones...the common thing for success is not too over leverage, and the common thing to being unsuccessful is over leverage. So be warned that if we have a lost decade, would you eventually sell out and capture your losses because of Loss aversion?

 

[GravitySucks]

I took out a HELOC so I didn't have to sell investments for tax smoothing reasons. Pretty much the same as borrowing to buy but the tax + ACA considerations are the driver in this case.

 

[kgtest]

One strategy I have used twice is the 0% credit card. What I do is get a 30k limit CC for 18 months. I put everything that I can on that card. I take the money that I would typically spend on gas/groceries/eating out/vacations/etc... and put it in the market. So basically instead of dropping the typical 2-3k/mo into the market I am now dropping 4-6K into the market. I do this for 15-16 months (the whole time having 20-30K cash in a money market) then reevaluate. At that time I will either pay off the balance (that's what I've done in the past) or transfer to another card. I would never carry a balance higher than the $ I had sitting in the money market account.

I've done this as well! I would rather pay a 3% transfer fee and get 10% returns in the market.

I decided against the HELOC myself, but this was more for awareness and curiosity if anyone has actually used this as a strategy.

I like what someone said about just putting new money in, rather than leveraging future money up front. I asked for a raise and just got a $6/hr raise so alas, I now have more new money with little risk...a much better strategy.

 

[ExFlyBoy5]

I didn't see anyone mention this, but a HELOC can be called and most of the contracts reflect this fact. I recall some folks here mentioning that in the 2008'ish era, many of these loans were indeed called. That could be a very, VERY bad deal.