Author Topic: Considering paying down HELOC with profits  (Read 1793 times)

RedmondStash

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Considering paying down HELOC with profits
« on: September 24, 2016, 09:25:42 AM »
I could use a sanity check.

We took out a HELOC several months ago to invest in index funds, and the market has been kind to us -- so far. I feel like a blackjack player who borrowed money and is now ahead, but knows that losses are coming eventually.

My questions:

- Does it make sense to sell off some of that profit to pay down a chunk of the HELOC, or at least to stash it in cash to pay our HELOC payments each month for the next year or so? We have no cash flow problems, but we hope to FIRE next year.

- During the initial 10-year draw period, are monthly HELOC payments reduced when you reduce the principal? We've had regular mortgages before (where extra payments didn't change monthly payments), but this is our first HELOC.

- I keep reading references to selling off the extra when profit exceeds projections, maybe called "value investing"? Does anyone know more about this approach?

Thanks.

Retire-Canada

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Re: Considering paying down HELOC with profits
« Reply #1 on: September 24, 2016, 09:52:57 AM »
1. How much is your HELOC balance?
2. What is the value of the rest of your assets?
3. So you've got sufficient cash flow planned once you FIRE for your living expenses and HELOC payments?
4. What was the purpose/plan for borrowing from your HELOC and investing? Did you have a specific objective?

I'd love to hear your answers to these ^^^ questions. My first comment would be you should have a plan for using your HELOC just like you should have an investment plan. That plan should have an objective to borrowing money to invest. It should have a number of contingency plans for likely market occurrences. It should also have a wind down for how you will pay off the HELOC and de-leverage.

Just because you made some money over a few months doesn't really indicate what your next move should be.

RedmondStash

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Re: Considering paying down HELOC with profits
« Reply #2 on: September 24, 2016, 10:18:27 AM »
1. How much is your HELOC balance?
2. What is the value of the rest of your assets?
3. So you've got sufficient cash flow planned once you FIRE for your living expenses and HELOC payments?
4. What was the purpose/plan for borrowing from your HELOC and investing? Did you have a specific objective?

I'd love to hear your answers to these ^^^ questions. My first comment would be you should have a plan for using your HELOC just like you should have an investment plan. That plan should have an objective to borrowing money to invest. It should have a number of contingency plans for likely market occurrences. It should also have a wind down for how you will pay off the HELOC and de-leverage.

Just because you made some money over a few months doesn't really indicate what your next move should be.

Good questions. I'm not comfortable disclosing our financial specifics, but I will say this:

1 & 2. Current HELOC balance is about 12% of our overall net worth. We don't have it maxed out.
3. We do have sufficient cash flow for FIRE, whether or not we have HELOC payments. We'll just have a little more with the HELOC funds reaping investment rewards.
4. The plan for the HELOC was to reduce the stagnant money just sitting in home equity and put it to work; our home equity is now about 25% of our NW instead of 33%.
5. You didn't ask, but the current interest rate on HELOC is 2.4%, but that jumps to at least 3.1% next April. The rate is variable and has nowhere to go but up.

What complicates matters is that we don't expect to spend the next 30 years in this home, so the HELOC isn't going to run its full course anyway. We may move in the next 3-5 years, and over that timeframe, the stock market's erratic bouncing could land us at a disadvantageous moment when we have to sell something to pay off the HELOC. We hope to get a new mortgage instead, but we'll be retired, so I'm cautious.

Basically, the reason I'm considering accelerating payments is the potentially shortened time window for repayment if/when we move. If I knew we'd be here for 30 more years, I wouldn't be considering paying it down unless the interest rate jumped too high. But the market's unpredictability over a 3- to 5-year span is higher than that over a 10- to 30-year span, so capturing some profits now seems enticing.

ender

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Re: Considering paying down HELOC with profits
« Reply #3 on: September 25, 2016, 08:56:49 AM »
Figure out your risk tolerance. Given the wording in your OP, it sounds like your risk tolerance is lower than using a HELOC for investments.

Historically you probably are better off having a low HELOC and staying in the market. But whether this is good for you depends on whether this will make you do other dumb financial things or stress you out. Some people have no problems with this from a risk perspective, some do.

Only you can know your risk tolerance.

RedmondStash

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Re: Considering paying down HELOC with profits
« Reply #4 on: September 25, 2016, 10:02:26 AM »
Figure out your risk tolerance. Given the wording in your OP, it sounds like your risk tolerance is lower than using a HELOC for investments.

Historically you probably are better off having a low HELOC and staying in the market. But whether this is good for you depends on whether this will make you do other dumb financial things or stress you out. Some people have no problems with this from a risk perspective, some do.

Only you can know your risk tolerance.

Yeah, I think you're right. We thought we had our risk tolerance figured out, but it might not be as high as we'd thought. Might be time to take a careful look at our AA.

I did finally realize after posting this that the HELOC isn't the problem, that if we had confidence in our plan and AA, I wouldn't be worried about the HELOC. Sometimes what seems like an issue in one area is actually an issue somewhere else.