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money "trapped" in house?

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  • #1

    money "trapped" in house?

    wasn't sure where to ask this but wanted to know what itulip community thought and saw the 401k thread in here, so i figured this would be an ok place to ask.

    what is the opinion on taking out a HELOC to invest? if i can borrow 25k at 5% for some lengthy amount of time, i can take x% and store it in PMs and y% and go over to prosper.com and fund AA credit rated loans for 10k or under at 7% all day.

    risk being 1. PMs in current market do not match what i'm paying in interest and/or 2. large amount of AA defaults lowering my real prosper rate of return. both of which i consider quite unlikely.

    thoughts?
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  • #2
    Re: money "trapped" in house?

    i suppose i should add that should the variable rate of a HELOC rise to make the other investments no longer worth it that one should have enough liquid money to pay the HELOC off quickly.

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    • #3
      Re: money "trapped" in house?

      Originally posted by mikedev10 View Post
      i suppose i should add that should the variable rate of a HELOC rise to make the other investments no longer worth it that one should have enough liquid money to pay the HELOC off quickly.
      My thoughts, for what it's worth:

      If you have the liquid money, why not invest that instead of the HELOC and save the interest?

      Another risk you don't mention is that PM's not only don't match interest, but actually lose money. I'm not sure what the odds of that are if your horizon is more than very short term, but it's something you have to consider. Are you willing/able to carry the HELOC indefinitely until PM's rebound if they do drop?

      You also have to overcome the 35% taxes on the PM's, while the HELOC interest is deductable at your marginal tax rate.

      My understanding of EJ's recent writings and appearances is he's advocating holding cash, or it's equivalent, for the next 12 to 18 months. I believe he's specifically not advocating buying PM's, but holding what one already has. Maybe I'm wrong (very possible). Or maybe EJ's wrong, but that I wouldn't bet on.

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      • #4
        Re: money "trapped" in house?

        You also have to overcome the 35% taxes on the PM's, while the HELOC interest is deductable at your marginal tax rate.
        There's some debate as to whether HELOC interest is deductible if the debt is used for anything other than home improvement and the total debt is greater than the fair market value of the property.

        http://patrick.net/wp/?p=594

        http://bigpicture.typepad.com/commen...carsvacat.html

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        • #5
          Re: money "trapped" in house?

          i don't actually have that liquid money. i'm just learning about HELOCs and due to the adjustment this does not seem to be the safest play. i'm not sure if any of my physical PMs will find their way into 35% capital gains...

          i have found a good way to do this though, providing one has a car worth something and mostly paid off.
          https://www.penfed.org/productsAndRa...-425cars040308

          4.25% for car refinancing, up to 60 months and up to 100% LTV. if your car is worth 20k and you only owe 1k on it... here's a way to borrow a heap of money at a flat good rate. long enough to buy PMs and/or work on some prosper loans.

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          • #6
            Re: money "trapped" in house?

            Unlike an adjustable rate mortgage that has annual or semi annual interest rate caps of 2% (usually) a HELOC has no cap except those imposed by your state or the federal cap of 18%...what this means to you is when prime starts going up...your rate will go up in lock step with prime rate (+ your margin)...it can go up very fast...ask Volker.

            Just FYI.

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            • #7
              Re: money "trapped" in house?

              ALSO, and this is very important: A HELOC is a full recourse loan - you can't walk away from it like you can (practically speaking) with a purchase mortgage* if you get into trouble.



              * Brooksgracie pointed out some of the minutia regarding mortage contracts, and while, depending on the laws of your state, a mortgagor might have recourse, it is often too expensive or too drawn out to be of practical import to the mortgagee -> no recourse in practice.

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              • #8
                Re: money "trapped" in house?

                Wasn't it that sort of thinking that got us in this mess to start with? Borrowing to invest, then leveraging phantom gains to create even more phantom gains?

                Debt is a tool like any other; an automobile, a gun, a power tool, etc.

                Used properly it can make society an immensely better place. Used improperly, it can kill.
                Greg

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