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Old 07-28-2021, 02:55 PM   #1
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Almost free cash

It is still possible to open an equity line of credit at 2.75% (eg. Citizen's Bank with .5% discount). I am thinking about opening a line of credit for anywhere between 100K and 250K and then investing that money in a basket of some fairly aggressive dividend ETFs (eg. PGX, SPYD, QYLD, et al) that pay monthly.

Assuming, I borrow 250K against my house, the monthly payout on this equity line would be $572.92. The monthly dividend would be approximately $1040. The monthly payments would be automated, so everything would require very little maintenance.

The equity line has a floating interest rate and a fairly high cap, but would plan to pay off the equity line if the interest rate hits 4.5%. Other than the obvious risks on investing the money in dividend ETFs, this seems like a win win situation. What am I missing ?

Thanks for your input.
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Old 07-28-2021, 03:02 PM   #2
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They could call your HELOC at any time. How are you going to pay off say a 50% call ?

Of course they would call when things are really bad, like the market tanks 40% and they make the call the next day.

Other than those bad things, it's an aggressive play. I did it during one of the recessions to smaller amount, sold it all off a few years later for 50% net gain in my money.
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Old 07-28-2021, 03:06 PM   #3
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I was not aware that a HELOC can be "called" as it has a 15 year payback period. But, I will pose the question as that would definitely increase the risk associated with this play.

Thanks!
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Old 07-28-2021, 03:09 PM   #4
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I think it would be safer if you took your home's equity and "invest" in crypto currency...that is where the REAL returns are!
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Old 07-28-2021, 03:17 PM   #5
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It is basically a common type of investing with leverage, generally with a variable interest rate, the interest rate can almost certainly be expected to go up based on current rates. It requires having an extremely high risk tolerance, and decent timing at least (such as right after a bear rather than a long bull market).

Not something I'd recommend for anyone right now, even with a very high risk tolerance. I most certainly wouldn't characterize it as free, it is just leveraged investing, you can end up like Buffett (uses his companies as leverage), or you can end up like Lehman (which funnily enough used the same type of leverage, just other's mortgages along with a mix of their own, all with bad timing). Of course, you won't go bankrupt due to the much stricter individual lending standards, unlike those on Wall Street, but you can certainly lose an arm and leg.
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Old 07-28-2021, 03:27 PM   #6
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Just to be clear to OP, I did it after a big bear when stocks were cheap, so I guessed they had to go up instead of down.
Still was a gamble.
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Old 07-28-2021, 03:48 PM   #7
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Do you have somewhere to live if the day comes where you can't pay off the HELOC? Do you have enough liquid assets to pay off the likely deficiency judgment? Have you explained this idea of yours to your spouse, including the risks, and gotten approval to proceed?
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Old 07-28-2021, 03:56 PM   #8
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I don't think I would ever take a HELOC to invest. But I did take the cash from the sale of our last home and invested it in our 60/40 portfolio instead of paying cash for the next house. Got a 30 year 2.75% fixed rate mortgage that I just refi'd to 2.25% 30 year fixed rate @ zero cost. Technically similar. Emotionally different. That move has netted me $102k in paper gains. Yeah me.
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Old 07-28-2021, 04:06 PM   #9
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I don't think I would ever take a HELOC to invest. But I did take the cash from the sale of our last home and invested it in our 60/40 portfolio instead of paying cash for the next house. Got a 30 year 2.75% fixed rate mortgage that I just refi'd to 2.25% 30 year fixed rate @ zero cost. Technically similar Identical. Emotionally different. That move has netted me $102k in paper gains. Yeah me.
FIFY.

There is no difference what so ever in taking a mortgage on a new house, that could paid with proceeds from the last, and taking a second, or HELOC on the original house.

Now, if it was a downsize, sure invest the left overs. If it is bigger house, sure, take a mortgage.

I am making no judgement on what you did, but there is no difference between taking a mortgage on the existing house to invest, and taking a mortgage on the new house so you can invest.
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Old 07-28-2021, 04:23 PM   #10
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FIFY.

There is no difference what so ever in taking a mortgage on a new house, that could paid with proceeds from the last, and taking a second, or HELOC on the original house.

Now, if it was a downsize, sure invest the left overs. If it is bigger house, sure, take a mortgage.

I am making no judgement on what you did, but there is no difference between taking a mortgage on the existing house to invest, and taking a mortgage on the new house so you can invest.
Agreed, except most HELOCs are variable rate. Inflation will kill ya. I'm betting inflation will be at or above 2.25% average over the next 30 years. In fact, the 10 year break even rate is 2.41%, so I am making money as we speak. Deflation is a risk, though. But I can refi again to mitigate that.
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Old 07-28-2021, 05:45 PM   #11
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There is no difference what so ever in taking a mortgage on a new house, that could paid with proceeds from the last, and taking a second, or HELOC on the original house.
Not entirely true. As mentioned, a HELOC can be closed/called at any time and that has happened in recent history. That doesn't really happen with a primary mortgage.
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Old 07-28-2021, 05:53 PM   #12
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Not entirely true. As mentioned, a HELOC can be closed/called at any time and that has happened in recent history. That doesn't really happen with a primary mortgage.
Fair enough. I have never had a HELOC so know little about them. So, everything I said applies if I call it a re-mortgage to a new rate with a cash out, right?
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Old 07-28-2021, 06:32 PM   #13
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Originally Posted by Bossman View Post
It is still possible to open an equity line of credit at 2.75% (eg. Citizen's Bank with .5% discount). I am thinking about opening a line of credit for anywhere between 100K and 250K and then investing that money in a basket of some fairly aggressive dividend ETFs (eg. PGX, SPYD, QYLD, et al) that pay monthly.

Assuming, I borrow 250K against my house, the monthly payout on this equity line would be $572.92. The monthly dividend would be approximately $1040. The monthly payments would be automated, so everything would require very little maintenance.

The equity line has a floating interest rate and a fairly high cap, but would plan to pay off the equity line if the interest rate hits 4.5%. Other than the obvious risks on investing the money in dividend ETFs, this seems like a win win situation. What am I missing ?

Thanks for your input.
You're missing two things.

The first is risk, which others have mentioned.

The second is taxes, which I don't think have been mentioned yet. You'll have federal and possibly state income taxes on the dividends as you go along, and you'll also (hopefully) have capital gains taxes when you go to sell the investments.
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Old 07-29-2021, 06:49 AM   #14
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Not something I'd recommend for anyone right now, even with a very high risk tolerance.
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Old 07-29-2021, 07:03 AM   #15
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I have considered doing this before, but did not feel you could invest to beat the cost by a large enough margin to justify the risk. If you invest very conservatively you can't lose much or make much. And rate rise kills you.

I would not find the risk/reward compelling.
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Old 07-29-2021, 07:54 AM   #16
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You don't have any cash available to do this instead of paying interest on a HELOC?
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Old 07-29-2021, 08:06 AM   #17
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William Bernstein on the subject of retirement saving: “Make no mistake about it: The object of this particular game is not to get rich – It’s to not get poor.”
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Old 07-29-2021, 08:08 AM   #18
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William Bernstein on the subject of retirement saving: “Make no mistake about it: The object of this particular game is not to get rich – It’s to not get poor.”
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Old 07-29-2021, 08:26 AM   #19
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Fair enough. I have never had a HELOC so know little about them. So, everything I said applies if I call it a re-mortgage to a new rate with a cash out, right?
Sho nuff!
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Old 07-29-2021, 08:50 AM   #20
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To risky for me.
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