Useful Links

Andre1969 · 05-04-2007, 07:55 AM

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 · 05-04-2007, 07:56 AM

.... 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 · 05-04-2007, 09:13 AM

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 · 05-04-2007, 09:17 AM

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 · 05-04-2007, 09:55 AM

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.

Freein05 · 05-04-2007, 10:48 AM

I would not use my home to gamble in the market. Take the excess cash flow and invest it monthly into a fund. You automatically gain 6 to 8% on your investing because you are not paying the bank interest. You also have the advantage of dollar cost averaging. The market is at an all time high and a lot of people want to get in. But remember what goes up will come down.

It can take a long time for the market to recover. The market did not recover from the 1929 crash until about 1954. The 1987 crash only took two years for the market to recover. There was also a bear market running form 1969 to 1982 that provided very little return for investments in the markets. Than we have the dot com and market bust of 1999/2000.

Be careful when you’re using your shelter for investing.

Mwsinron · 05-04-2007, 11:46 AM

Quote:

Originally Posted by Freein05

I would not use my home to gamble in the market. Take the excess cash flow and invest it monthly into a fund. You automatically gain 6 to 8% on your investing because you are not paying the bank interest. You also have the advantage of dollar cost averaging. The market is at an all time high and a lot of people want to get in. But remember what goes up will come down.

It can take a long time for the market to recover. The market did not recover from the 1929 crash until about 1954. The 1987 crash only took two years for the market to recover. There was also a bear market running form 1969 to 1982 that provided very little return for investments in the markets. Than we have the dot com and market bust of 1999/2000.

Be careful when you’re using your shelter for investing.

Then again there is all those bull runs....

al_bundy · 05-04-2007, 12:03 PM

and a few 20 year bear markets in between

Mwsinron · 05-04-2007, 12:05 PM

So obviously its an easy decision.

haha · 05-04-2007, 12:33 PM

I have never had a HELOC- do the interest rates float? What are typical terms?

Even if they are floaters, it is better than using margin because the rates will be lower usually, and you cannot get a margin call.

Ha

brewer12345 · 05-04-2007, 12:41 PM

Typically prime-based floaters with a 10 year draw period (during which advances arre interest only) and a 15 year repayment period after the initial 10 years.

haha · 05-04-2007, 12:51 PM

Thnx Brewer.

ha

BUM · 05-04-2007, 08:05 PM

This is not an original idea by any means. In China, where the market is schwinging straight up, extended families are moving in together, selling all and investing in stocks.

If ever there was a reason to go-away-in-May... :P

cute fuzzy bunny · 05-04-2007, 08:19 PM

Quote:

Originally Posted by 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.

DING DING DING!

ADJ · 05-04-2007, 09:19 PM

Wow! I knew when I posted this question, I would get a lot of really good advice. Thank you! The reason why I posted this question is precisely because I am reluctant to do this given the uncertainty of the market. I determined that my actual interest rate would be around 4% (considering the tax savings) on my mortgage after refinance. I figure I could definitely do better in the market but at the same time, I understand the security in not fooling with your home. I have a small mortgage balance of about 200K. I have enough cash sitting around to pay it off. For those that don't think I should refinance to pull out cash, would you suggest paying of the mortgage balance rather than investing in mutual funds?

cute fuzzy bunny · 05-04-2007, 09:21 PM

Yeah right.

Please do a thread search on 'paying off the mortgage', before you start world war 16. Again.

REWahoo · 05-04-2007, 09:23 PM

Quote:

Originally Posted by ADJ

I have a small mortgage balance of about 200K. I have enough cash sitting around to pay it off. For those that don't think I should refinance to pull out cash, would you suggest paying of the mortgage balance rather than investing in mutual funds?

Out of the frying pan, into the fire...