Has anybody taken home equity to invest

[floatingdoc]

Mortgage rates are at all time lows, no news there. I have 100% equity in my house and can easily get 250k out without much effort at 3.99 10 years no closing costs. Obviously, if I beat a return of 3.99 I did ok. The mental "return" of knowing my house is paid for is worth quite a bit to me however. I keep thinking though that I am missing an opportunity at these interest rates.

Age 44, retiring hopefully at age 51. Has anyone here done this?

 

[Trawler]

I have not personally done this however I do know some who did during the last recession. Got in in 03 and out in 05 and did quite well and was retired at the time however his situation was as follows:
Timed market right and bought close to the bottom watched it grow 25-30% and got out quickly.
his retirement pension income covered expenses including new payment.
Took out fixed rate in case of long term wait for market recovery.
Had plenty of other assets to pay off debt if he choose to.
Bought individual high yielding dividend stocks

So for this person if the went bad it would not impact retirement style of living.

I thought about doing this however for me if market went south so would my early retirement plan and I was not willing to risk ER.

 

[MasterBlaster]

We (and every other financial forum) saw much discussion of this topic prior to the great recession. The question typically posted was... If I have some extra money should I pay down the mortgage or invest in the markets. We saw eliborate postings giving historical returns of the equity market making it appear to be a sure thing.

http://www.early-retirement.org/for...f-the-mortgage-or-invest-the-money-30644.html

One could make a case that if the markets do better (tax adjusted) than your (tax adjusted) mortgage that you would come out ahead. perhaps way ahead.

It goes without saying though, that you are taking on much more risk. You might ask yourself though... What is the downside if I am wrong ? What if I lose my job ?Do I then have to live in my car ?

 

[Texas Proud]

Had a BIL do it... he also did the zero interest credit cards... he passed and it took my sister 3 years to pay off the CCs... she does not want to pay off the mortgage as it would be half her savings..

Her saving grace is she gets a pension that covers 100% of her expenses and did not need the savings...

Funny, we talked about it last week and I said that her 'net' savings was X... she is OK with that...

It was a flaw with BIL.. if he had $1 mill in cash because he went $1 mill into debt.. he would say 'I got a million dollars'....

 

[floatingdoc]

That was my feeling also trawler, that is why I have not pulled the trigger. I think firecalc has me safely retiring 52

 

[brewer12345]

I borrowed a chunk of money on a HELOC in late 2008 and bought investment grade bonds trading at double digit yields. I eventually sold off the bonds as they reached par (and 5% yields) and paid off the loan.

 

[Gone4Good]

I have not done it, but the hurdle rate (~4%) does seem low enough to justify the risk. I worry, though, that the low interest rates may reflect low risk premium generally, so maybe it isn't the slam dunk it first appears to be.

I could do the same trade, but won't. My views on risk have evolved. For me it's no longer simply a question of risk tolerance (which historically has been quite high in my case) but more importantly about proximity to financial goals. If I don't need to take more financial risk to reach my goals, why should I, even if I think I could "tolerate" the downside? Right now I'm shedding risk in a rising market. I'll consider adding risk if risk premiums return in a meaningful way.

 

[haha]

I worry, though, that the low interest rates may reflect low risk premium generally, so maybe it isn't the slam dunk it first appears to be.

If CAPM isn't total fantasy, this has to be true.

 

[Animorph]

I did it with a HELOC from late 2001, paid it back in 2006 and made a little. Did it again in 2008 and a cash out mortgage refi in mid 2009. The second time worked great. Made about 90% on the HELOC borrowed money. Paid back most of the HELOC a month ago since I'm building cash at this time and that's a good place to "store" it. Invested in all equities each time. The HELOC interest rate varied from 2.5% (now) to maybe 5% when I gave up the first time. The mortgage rate is fixed 30 year at 4.375%. If I can't do better than that in equites over 30 years many of us will have problems.

 

[Westernskies]

It's the old risk vs. reward question.

If you are comfortable with the risk (in this case potentially losing your family home) then pursue the reward.

I've used HELOC's about a dozen times in the past to invest in Real Estate, build second homes, etc- but never to invest in the market; just my own comfort zone, not a fear that one investment vehicle was inherently riskier than another. (My rationale was that it all went to sh*t, I could always go live in the investment home) All but one of these transactions worked out very well, but I was fully prepared when I signed those big HELOC checks that it could just as easily go the other way. I have a fairly high tolerance for risk, but self-mitigate by keeping the amounts manageable.

Good luck and keep us posted.

 

[xynny]

My parents used their cheap home equity to buy a couple rental properties with cash. The properties rented out pretty quickly and they're making around 10% on their equity. It took them a while to look at and research all the properties , though, so it's still work, but for them it is worthwhile.

 

[veremchuka]

if you can buy cds that yield > 3.99% + the taxes you'll pay on the profits + the interest you'll pay on the loan - loan tax deductibility, if you put it into equities what if you loose $100k? what if bonds drop in price? sounds like you are close to retiring and iirc you once said you don't have investments in the markets just cds. seems to me you are putting a ton of risk in your life when you really don't need it. if you can time when to buy and sell equities you'll make a fortune and you only have to be right twice.

 

[brewer12345]

what if bonds drop in price?

I didn't care. I piced individual bonds that I could do credit work on (underwrite, in effect) and made sure that the bonds would mature before the HELOC was due. So if I had to hold to maturity I was fine, absent defaults.

 

[Gone4Good]

I didn't care. I piced individual bonds that I could do credit work on (underwrite, in effect) and made sure that the bonds would mature before the HELOC was due. So if I had to hold to maturity I was fine, absent defaults.

Yeah, there were some fat pitches out there. I recall some 2 year, single-A, utility operating company, floating rate bonds trading at nearly LIBOR+1,000, while HELOC rates were like LIBOR+300 or so (maybe less, I forget). I didn't have a HELOC already, and no way to get one in late 2008/early 2009, but I know some folks who put on a lot of those trades.

 

[lowflyer]

In '06 and '07, I funded a relatively small SIMPLE IRA from a HELOC, rather than have to dig up other funds. I bought some fixed-income investments that I still have. I have never paid off the HELOC due to the extremely low rate. I have not done it since and I will likely pay the LOC off at some point when rates go up to an uncomfortable level. In the meantime, there's a good spread between the income from the investment and the loan expense.

Having said that, there was a point back a couple years ago when this looked like a pretty stupid idea. In retrospect, I'd not do it again. For a generally conservative investor, doing this just doesn't fit the profile. Again, this was not a huge amount of money, so pretty low risk.

 

[brewer12345]

Yeah, there were some fat pitches out there. I recall some 2 year, single-A, utility operating company, floating rate bonds trading at nearly LIBOR+1,000, while HELOC rates were like LIBOR+300 or so (maybe less, I forget). I didn't have a HELOC already, and no way to get one in late 2008/early 2009, but I know some folks who put on a lot of those trades.

I was buying 5 year BBB and A corporates at 12 to 15% ytm and financing with a heloc at prime minus 50 BP.

 

[73ss454]

If I tried this technique I know exactly what would happen, that's why I don't do it.

 

[Gone4Good]

I was buying 5 year BBB and A corporates at 12 to 15% ytm and financing with a heloc at prime minus 50 BP.

Ahh, the good old days.

 

[SVHoper]

Used HELOC to buy 2 REOs in 2009...100% financed. Sold one - made about $45k; kept the other - it contributes $700/month above interest, insurance and property taxes (maintenance v.small as new roof).

HELOC is variable interest rate so will use it to enter another fixer upper, but will want to refinance for long term.

Although I have improved from zero value dotbombs to last 3 purchases making (JAVA, CIT and C) significant % play money gains, I don't think I will live long enough for me to improve enough to leverage my stock judgement.

 

[traineeinvestor]

I took out a bigger mortgage against our home to finance my capital contribution to my firm in early 2009 rather than sell some of my equities. So far it has been a very good decision.

I'd be happy to do it again in the right circumstances and for the right investment (i.e. when the market has tanked and decent assets are going cheap), but I wouldn't do it now.

 

[MooreBonds]

Although this isn't specifically what I'm doing, it is in an indirect way.

This past Friday, I applied/locked in to refinance a 20 year, 4.99% Pen Fed Home Equity Loan with the Pen Fed 30 year, 5/5 ARM at 3.375% (with 1/8 point, no closing costs). I fully intend to have the house paid off by year 10, largely from cashing in some savings bonds that reach final maturity each year over the next several years.

After 5 years, the ARM resets the rate once every 5 years, and can only increase the rate by a max of 2.00% each time...so worst-case scenario is my mortgage rate will be 3.375% years 1-5, and 5.375% years 6-10.

My monthly payment will drop from $1,240 to about $880. I'm debating on what to do with the excess cash flow (since I already max out all available tax advantage accounts)...I'm pretty sure I'm not going to pay anything off early in years 1-5, but don't know if I should redeploy the cash in a Vanguard fund or individual dividend payers or what. My pipeline MLPs have risen nicely, and still might have some room to run, but have also been agonizing over whether to take the gains or simply leave them there and collect the 6%+ tax-advantage distributions.

As the savings bonds mature in 2011 through 2016, there will be a significant tax bite, but after taxes, they will account for roughly 80% of the mortgage principal.

I have substantial assets to where I can afford to take the risk with investing the extra $400/month; also, I like the added bonus of having the potential of having a 'reasonable rate' mortgage in years 10-15 if somehow rates stay low/fall again (surely not counting on it, though) and simply continue making bi-weekly mortgage payments with letting the money ride - although, if rates are this low 10 years from now, it likely means the economy is in the crapper, and there likely won't be many attractive investment options (not to mention that my entire portfolio would likely be down).

Now that I think about it, perhaps I'll be re-evaluating the paydown option in year 6....

 

[REWahoo]

Although this isn't specifically what I'm doing, it is in an indirect way.

Same here.

When I bought our motorhome in 2007 I paid half in cash and used our variable rate HELOC to finance the balance. My plan was to wait until 08 to pay it off but the market crash meant I'd have to sell at the bottom to do so.

Thankfully the market and my HELOC interest rates moved in opposite directions. The rate dropped to 2.4% in late 08 and is still there. I'm doing significantly better than that in the market, so I'm not going to pay it off unless/until my interest rate increases.

 

[RetirementColdHardTruth]

Being a spring chicken and only just having paid of my Mortgage about two weeks ago I want to let this exciting little flutter in my heart play out for a lot longer before taking on debt again. There is a feeling I cant really explain to being fully debt free at 38. I am womdering how I will feel in another 12 months or even a few years from now having no debt payments to make.

My feelings are I can always get anotjer loan if I want to go back to the world of having to work if things go against me. Just ask yourself the question, is it greed making you take on the extra risk to eek out a few extra percentage points. Even compounding you only have 6-7 years to go before ER, is the couple extra thousand worth the risk of having to work past 51 if the investment goes against you?

 

[Danmar]

Being a spring chicken and only just having paid of my Mortgage about two weeks ago I want to let this exciting little flutter in my heart play out for a lot longer before taking on debt again. There is a feeling I cant really explain to being fully debt free at 38. I am womdering how I will feel in another 12 months or even a few years from now having no debt payments to make.

My feelings are I can always get anotjer loan if I want to go back to the world of having to work if things go against me. Just ask yourself the question, is it greed making you take on the extra risk to eek out a few extra percentage points. Even compounding you only have 6-7 years to go before ER, is the couple extra thousand worth the risk of having to work past 51 if the investment goes against you?

+ 1 Get out and stay out of debt.

 

[brewer12345]

FWIW, although I borrowed to invest, as a rule I really do not like the idea. I did so because I had a lot of ground to regain due to the crash and there was a really fat pitch there. Now I have zero out on the HELOC and I aggressively pay down my PF 5/5 ARM with roughly triple the scheduled payment every month.