If there is already a thread on this specifically, would someone please direct me? Tried searching and scanning the threads and didn't find anything conspicuous.I'd love to hear if and how some of the riskier folks here are using this "nearly free*" money source to lever investments, as well as anyone using them to conduct rate arbitrage or even capitalize a business. What is your rationale? When would you use them, if at all? Any constructive admonition
beyond "risk-adjusted return!!!"?
There are several experiences I'd like to share to get the discussion rolling:
0. First, I'd like to explain balance transfer checks (BTCs) as I've experienced them. We are interested in the ones you can actually cash / send money to yourself. So, CC Company XYZ either mails a physical check or emails you an offer with certain promotional rates. Sometimes there are two options: 0% APR with a transaction fee (1-5% of transfer) or 0% transaction fee with low APR (lowest I've seen is 5.99%). The transaction fee is charged to the credit card and "rolled into" the loan amount. There are minimum payments due every month of around 2% of the balance (YMMV). The
huge catch is, if you make a purchase after the BTC posts to your account, the whole balance is treated as a
regular purchase. BTCs should only be reserved for CCs that can be locked up for a while. Anyway, moving along.
1. My first foray into using BTCs was
incredibly, stupidly risky. I used the funds to lever an investment I was already long in - stock in ONE small-cap technology company. Doh! Fortunately, I came out ahead, but risk-adjusted returns were piss poor. Using the sales proceeds, I promptly paid back the transfer amount and pocketed the short-term gain (ouch again).
2. After wising up and switching to all low-cost index funds, another BTC came along. It was a 0%er, 3% transaction fee for 18 months, equivalent to 2% APR prepaid interest. Hmmm...we just bought a house...3.625% interest rate...I could use this to make a fat principal payment and benefit from rate arbitrage (the difference between BTC rate and the mortgage rate). I will save 1/17th of the CC balance each month in my high-yield savings and pay back the transfer when it comes to the end of the promotional period! Interest saved on mortgage + interested earned on sinking fund > BT fee. Win-win, right? Right? Well, I dug a little deeper.
If I were going to
pay down my mortgage anyway, I would have been better off just paying the damn thing down with what I would need to save each month to pay back the BTC (see attached). If the mortgage rate were higher, there would be some value in using the BTC. If the mortgage was at least 2 years old, and I wasn't already at or below 80% LTV, the BTC could help eliminate several PMI payments, thereby significantly improving its value
if I didn't plan on using savings to accomplish any of this in the first place. And there, my friends, is the key.
Every last red cent of my monthly residual savings is dumped into equities. I'm a recent convert to the "keep the mortgage" club (thanks
arebelspy et al!). Yes, I would take out a HELOC and invest it. So, if I plan on keeping the mortgage to turbocharge my investments, why would I curtail that US-dollar-shorting, inflation-hedging money parade with additional cash, let alone a BTC? Moreover, one has to generate the cash flow to cover not only the minimum monthly payments but also enough to cover the total amount when due. You can't "cash out" part of the house to do this. Plus there's the opportunity cost of missed investment returns from the sinking fund. I suppose you could invest that, too...but...yikes. Rate arbitrage on a mortgage isn't the best idea. There is no other debt (as it should be!) to deploy this strategy against, which leads me to...
3. Resuming the BTC examples, here's what I actually did with that opportunity from #2 - I maxed out my IRA and part of my wife's. The cash flow kink is still an issue, as I can't feasibly pull out money from the IRAs, but the destination of the set-aside funds would be equities nevertheless; I simply accelerated the savings process. My rationale:
front-loading our tax-deferred accounts will likely yield a sufficiently greater return (
67 - 75% chance!) than dollar cost averaging as the funds became sporadically available, which should more than offset the incurred interest expense. I ran some numbers based on 7% nominal returns and strategically timed sinking fund additions and there's a decent amount of accretion due to the BTC method.
Examples #2 and #3 are obviously less risky than #1. There's collateral being chucked toward the obligation. The principal is conserved via the sinking fund. I'm damned hesitant to repeat #1 as 100% levered, even in muni-bond index funds where after-tax yields are highly probable to beat out the 2% from the BTC and principal will (most likely) remain intact. 18-24 months isn't nearly a long enough period to ride out the volatility and cash out on top before the balance is due. Risk-adjusted returns need to be significant to justify this undertaking / huge mistake.
Unless... I started a BT ladder...... :)
Thoughts, beefs, success stories, horror stories, hacks? Should we even bother with these?
*The 0% APR, low-to-no transaction fee, longer promotional period sort. I have seen one through First National Bank of Omaha that offered 5.99% APR for "the life of loan"...I couldn't find how long it would live in the small print...but something like that could prove useful for financing a business venture rather than working interest rate voodoo. Sure cheaper than equity, but it largely depends on the cash flow requirements. I considered this for springboarding my wife's photography business! Things worked out differently however. Wow what a tangential footnote.
