Author Topic: Investing with a heloc?  (Read 5472 times)

gluskap

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Investing with a heloc?
« on: March 19, 2015, 02:54:12 PM »
So a friend of mine is thinking about taking out a heloc to invest in the stock market.  His reasoning is that he is in a very high tax bracket (42.3% marginal federal and state tax) and that the interest rate would be 3.25 -3.75% and he's anticipating an average 8-10% return on the market.  He figures that the mortgage interest is deductible and he would only pay 24.3% on long term capital gains.  I thought this seemed like a risky thing to do since market seems like it's headed for a correction plus with his high income and AMT, he would start getting phased out for mortgage interest deduction after a certain point.  Has anyone done this or considered doing this?  Is this a good idea?  Some other points other friends brought up would be he might take a hit on his credit score since a heloc would be treated like a credit card loan but he is not needing to buy a house or car anytime soon.  He's thinking of taking out a $100k heloc and has enough money where he could ride out a market correction.  Anything else he should be considering? 

dandarc

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Re: Investing with a heloc?
« Reply #1 on: March 19, 2015, 03:05:34 PM »
HELOC's are usually adjustable rate.  That's one thing to consider.

Lots of people on this forum have long-term keep the mortgage on the house plans, so they can invest that money in the market.

Chuck

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Re: Investing with a heloc?
« Reply #2 on: March 19, 2015, 03:06:35 PM »
The theory is sound. The time to do this was three years ago, however. Not now when the market it at all time highs.

Don't get me wrong, I still max all my tax deferred vehicles and then some... but I would be very uncomfortable taking on leverage at this point.

Gone Fishing

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Re: Investing with a heloc?
« Reply #3 on: March 19, 2015, 03:13:35 PM »
I'd be tempted to do it, AFTER the next crash.  I would be more interested in a cash out refi or a fixed rate 2nd than a HELOC.

sol

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Re: Investing with a heloc?
« Reply #4 on: March 19, 2015, 03:20:29 PM »
I'm generally opposed to any plan that exposes you to total wipeout risk.  If you've already won the game, why risk it?

James

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Re: Investing with a heloc?
« Reply #5 on: March 19, 2015, 03:28:37 PM »
I use a HELOC for short-term, intermittent loans such as construction loans for spec building.

If I was going to dump the money into the stock market for the long-term I would just take out a mortgage on my house (or do a cash-out refi if I had an existing mortgage with $100k equity built up).  That way I wouldn't have to worry about the interest rate increasing.

Any particular reason he wants to do a HELOC instead of mortgage?


I agree, refi and dump into index funds for the long haul. who cares where the market is right now, what he cares about is where the market is in 10-20+ years right? Even in a correction it is hard to judge the bottom, best to just either dump it all in or dollar cost average over the next year. Both have risks, and both would be fine. Locking in these extremely low rates for a long time seems like a good idea if the payments aren't a problem long term.

Retire-Canada

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Re: Investing with a heloc?
« Reply #6 on: March 19, 2015, 04:12:37 PM »
So a friend of mine is thinking about taking out a heloc to invest in the stock market.

I just bumped my LOC [no home equity as collateral] to $30K as an emergency fund and as a source of extra liquidity if some stock market corrects and it looks like there are deals to be had.

It's not a ton of money, but I could live off $30K for a year and it's approximately what I can save in a month x 10.

I might never use it, but I could also be glad to have it.

-- Vik

jmusic

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Re: Investing with a heloc?
« Reply #7 on: March 19, 2015, 04:27:57 PM »
So a friend of mine is thinking about taking out a heloc to invest in the stock market.

I just bumped my LOC [no home equity as collateral] to $30K as an emergency fund and as a source of extra liquidity if some stock market corrects and it looks like there are deals to be had.

It's not a ton of money, but I could live off $30K for a year and it's approximately what I can save in a month x 10.

I might never use it, but I could also be glad to have it.

-- Vik

The main problem with this approach is that when things get bad, banks are looking to reduce their exposure which usually means reducing/closing outstanding available credit.  Not saying that it's a bad idea, but a backup plan is certainly warranted.

Retire-Canada

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Re: Investing with a heloc?
« Reply #8 on: March 19, 2015, 04:46:23 PM »
The main problem with this approach is that when things get bad, banks are looking to reduce their exposure which usually means reducing/closing outstanding available credit.  Not saying that it's a bad idea, but a backup plan is certainly warranted.

I've been with the same bank for 29yrs and never had so much as a cancelled cheque. Not saying they can't shut down my LOC, but by the time that happens there will be riots in the streets because I will not be the first person whose credit they will take away.

My back up plan is:

- GF with a steady Gov't job
- I live in a country with universal health care and pharmacare for low income folks
- I have a wide range of employable skills and I'm not too proud to flip burgers
- I have home equity if I choose to sell the house or rent out a room
- I've got a few vehicles and other valuable items that I could sell
- I've got a large investment portfolio which even at 2008 crisis levels would still be worth a significant amount

If I can't make life work with that then stuff has gotten really bad.

Reading this old 2008 crisis thread over at Boggleheads ----->>  https://www.bogleheads.org/forum/viewtopic.php?p=432493#p432493

It was interesting to note that Market Timer who was highly leveraged and wiped out my equities losses kept getting more and more credit all throughout the panic. They only cut him off when he was hundreds of $K's in debt.

I think a LOC as an EF makes a ton of sense and I think the risks are being overstated. I'd rather be in that situation than having $100K under my mattress losing value and losing out on the potential market returns it could earn just in case someday somehow I need some $$.

-- Vik

Bikeguy

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Re: Investing with a heloc?
« Reply #9 on: March 19, 2015, 05:07:14 PM »
Knew a guy that did this.  Made great money in 2007.  Doubled down in 2008.  Not so good.  I hope your timing is better than his was.

bacchi

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Re: Investing with a heloc?
« Reply #10 on: March 19, 2015, 05:58:48 PM »
Keep it under $100,000.

Quote from: IRS
Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2014 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2).

Drew664

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Re: Investing with a heloc?
« Reply #11 on: March 19, 2015, 07:11:33 PM »
I'm generally opposed to any plan that exposes you to total wipeout risk.  If you've already won the game, why risk it?

This.

Is your friend factoring the risk? Maybe its a small part of his financial world, I dunno. Too much risk for low gain for myself, but then again I'll swim against the 'math' current more than most here. Stability is important to me.