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

[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]

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]

Quote:

Originally Posted by 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.

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.

[Closet_Gamer]

Quote:

Originally Posted by NW-Bound 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.

If you're going to go...go big:

Borrow money to buy LEAP options on a 3x leveraged NASDAQ ETF.

For the avoidance of doubt, this is a joke and very bad idea!

To the OP question, I would personally not use a 5% variable rate loan as a source of market funds. The spread between likely returns and the interest rate paid is too thin for me. Of course, I also paid off my house, so I'm just debt allergic in general. Good luck!

[MarieIG]

Quote:

Originally Posted by kgtest 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.

Excellent!

[Time2]

A little over a year ago I moved my taxable money to IBKR in anticipation of borrowing on margin. I let the move bake for a month then borrowed a large amount on margin and had it sent to my bank. IBKR margin rate at the time was 1.52%. I then bought a HUD Repo fixer upper house that my daughter and son in law wanted. I gave them a 2 year mortgage, first year at 4%, second at 6%, as a big incentive to get the house fixed and remortgaged. I was at about 39% margin, and it was suggested to me to get a HELOC and pay that down, just in case the market tanked, so, my funds would not get sold. So I went to my bank, I said I'd like to get a HELOC, I don't have a job, I don't have a regular income, but I have saved well! I just gave them my Vanguard statements and I got $100k HELOC. The sweet part of that, is they had a 6 month teaser rate of 0.99%. I sent the $100k into IBKR to pay down my margin. The kids (and I) got the house up to mortgagable shape and they got a 3.25% 15 year mortgage, within 10 months and I got paid back. It worked out better than I could have planned it.

With the rate increases, IBKR margin loans are now 3.33% for $100k to $1M.

[JBTX]

I’ve recently toyed with the idea of a HELOC but not too seriously, as a liquidity bridge so I don’t have to liquidate ibonds for some potentially large and unusual expenditures. But I would never want to be locked into one that I couldn’t pay off right away if rates went up.

The problem with 5.5% is there likely isn’t a tax deduction and investments will generate capital gains and interest so you likely would need near 7% to breakeven. Then of course there is risk in the investment and also the interest rates. What if we go 1980 style stagflation with high interest rates and a tanking stock market? It’s not a risk I’d want to take.

I don’t have an issue with using a lower interest fixed mortgage to fund investments, but I would need a higher spread than that.

[kgtest]

Quote:

Originally Posted by JBTX I’ve recently toyed with the idea of a HELOC but not too seriously, as a liquidity bridge so I don’t have to liquidate ibonds for some potentially large and unusual expenditures. But I would never want to be locked into one that I couldn’t pay off right away if rates went up. The problem with 5.5% is there likely isn’t a tax deduction and investments will generate capital gains and interest so you likely would need near 7% to breakeven. Then of course there is risk in the investment and also the interest rates. What if we go 1980 style stagflation with high interest rates and a tanking stock market? It’s not a risk I’d want to take. I don’t have an issue with using a lower interest fixed mortgage to fund investments, but I would need a higher spread than that.

Makes sense!