Author Topic: Pay off Home Equity Line of Credit, vs investing- what would you do?  (Read 5443 times)

purplish

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I have a Home Equity Line of Credit I've used for real estate investing- I'm using it like a mortgage, essentially.  The interest rate is 3.99% for the life of the loan.  I'm going back and forth whether I want to put all my extra money towards it, vs pay a smaller amount over a longer period of time, and use the rest of my money to invest in the way Mr. Moneymustache recommends.  Technically I'd make more money investing, since the interest rate is low.  However, it would be nice to not have that debt... the age old question on here I guess, mortgage vs investing!

Gin1984

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Re: Pay off Home Equity Line of Credit, vs investing- what would you do?
« Reply #1 on: April 05, 2014, 12:58:34 PM »
It depends on what you want to do.  When do you want to not need to work?  Have you already put enough money aside to do that?  How much does the real estate investing bring in?

purplish

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Re: Pay off Home Equity Line of Credit, vs investing- what would you do?
« Reply #2 on: April 05, 2014, 01:08:03 PM »
It depends on what you want to do.  When do you want to not need to work?  Have you already put enough money aside to do that?  How much does the real estate investing bring in?

Most of my savings are in property, which is why I have lots of equity available.  I have $6-7k in stock, and $3 in the bank.  I own 2 properties, and get rent from both which pays for themselves, plus a bit extra (like, $500 over a month).  I will have a jump in pay this summer, which I will be able to save much more.  I'm just wondering what you guys would do as far as paying off a 3.44% housing loan, vs using the money for investing.  Or maybe do 50/50 split?

*Edit- Oh, and as far as not need to work- I have to work full time for the next 2 years in order to get licensed in my field, and after that I would like to go into private practice, seeing clients on my own time when I'd like.
« Last Edit: April 05, 2014, 01:10:19 PM by purplish »

Gin1984

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Re: Pay off Home Equity Line of Credit, vs investing- what would you do?
« Reply #3 on: April 05, 2014, 02:23:03 PM »
So no Roth, no 401k, nothing?  Then I'd one, be building up my EF for when I am self-employed and two investing in the stock market like crazy.  I'd personally let the loan ride for now until you have a lot more in stock.

msnln7

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Re: Pay off Home Equity Line of Credit, vs investing- what would you do?
« Reply #4 on: April 05, 2014, 07:09:01 PM »
I own a few rental properties and I had similar dilemma up until a few months ago.  My concern always had been that HELOCs are adjustable rate (mine is tied to prime rate) and was worried interest rates would shoot up and my interest cost would sky rocket.  Then, one day a thought occurred that it is much more important to have a separate reserve set up in the form of diversified stock portfolio because if an emergency happened, such as a job loss, and I could not pay my monthly HELOC payment, I could potentially lose my properties, even though debt to value on the property is way below 50%.  I do have a healthy emergency fund in savings that will last me about one year but that is for living expenses, not pay investment property HELOC.  My properties also give off more in income than expenses but I've had situations where tenants move out and a new tenant would not move in for more 6 months.  If job loss happened to coincide with vacancy, I could potentially get in trouble.  For this reason, I put any excess funds I have into VOO, exchange traded S&P index, which has been up 13.6% over the last seven months.  Once I have built up enough to pay off my HELOC, I intend to sell the ETF to repay the loan.  But until then, I have cushion against any unforeseen cash flow problems.

Argyle

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Re: Pay off Home Equity Line of Credit, vs investing- what would you do?
« Reply #5 on: April 06, 2014, 04:47:25 AM »
You say, "Technically, I'd make more investing..."  — over the long term, maybe, but remember that investments go down as well as up.  Paying off your HELOC is a guaranteed return of nearly 4%.  To exceed that after taxes by investing you'd need a 6+% return, and remember investments are never guaranteed...

I think the real question is: would you take out a HELOC (and put your property at risk) just for money to put into the stock market?  Why not do it the traditional way — with money you can spare?

Villanelle

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Re: Pay off Home Equity Line of Credit, vs investing- what would you do?
« Reply #6 on: April 06, 2014, 05:02:14 AM »
At 4%, I'd pay off the HELOC. 

I am in a similar situation, but my HELOC is 2.6%.  At that rate, if it were fixed, I'd never pay it off.  Since it is adjustable, I am dumping about $1200 per month at it, but that is *only* because it's adjustable.  But for me, at 4% (plus various tax implications), it wouldn't be worth the increased risk of having t in the market. 

I think this largely comes down to your personal risk and optimism levels though. 

Gin1984

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Re: Pay off Home Equity Line of Credit, vs investing- what would you do?
« Reply #7 on: April 06, 2014, 06:34:41 AM »
You say, "Technically, I'd make more investing..."  — over the long term, maybe, but remember that investments go down as well as up.  Paying off your HELOC is a guaranteed return of nearly 4%.  To exceed that after taxes by investing you'd need a 6+% return, and remember investments are never guaranteed...

I think the real question is: would you take out a HELOC (and put your property at risk) just for money to put into the stock market?  Why not do it the traditional way — with money you can spare?
But what happens if he loses his job before the HELOC is paid off, he will lose the property no matter how much he has paid down.  If he invests it, he can still pay it if he loses his job.  Also, the idea that over 30 years, he won't make more from the stock market than 4% is unlikely.

Dr. Doom

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Re: Pay off Home Equity Line of Credit, vs investing- what would you do?
« Reply #8 on: April 06, 2014, 07:10:15 AM »
At 4%, I'd pay off the HELOC. 

I am in a similar situation, but my HELOC is 2.6%.  At that rate, if it were fixed, I'd never pay it off.

+1.  4% is a decent guaranteed rate of return and you can easily access the money you dump in there by simply taking it back out.   

It's tempting to put it in the market because of the bull run in US equities but past recent performance doesn't predict future performance and you can't time the market.

That being said, if the market goes down 20% over the next year, dropping P/E significantly so you feel stocks are on sale again, you could always take a bunch of money out and stuff it in the market at that time.

It's a tough call at 4% though.  You could also cut the baby and go halvsies.  If the rates ever rise to even 5%, it becomes a no-brainer and I'd throw everything I had at it (assuming no other debt and you're already maxing your 401k/IRAs)
« Last Edit: April 06, 2014, 11:44:23 AM by Q_Train »

Thegoblinchief

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Re: Pay off Home Equity Line of Credit, vs investing- what would you do?
« Reply #9 on: April 06, 2014, 07:21:08 AM »
At a fixed rate of 4, I would be investing in all of my tax-efficient buckets like mad.

If you're worried about a downturn, accumulate an e-fund of an appropriate number of months, unless your net cash flow already exceeds the minimum payments on the HELOC.

purplish

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Re: Pay off Home Equity Line of Credit, vs investing- what would you do?
« Reply #10 on: April 06, 2014, 11:12:47 AM »
Thanks for all the ideas to think about, keep em coming :)  So far I'm leaning towards either 50/50 split, or paying a bit of a higher amount then I was, with all the rest going towards investing.  Hmmm....

Question- in terms of other places to keep money, such as tax efficient/Roth IRA's, etc, are you saying I should have both a Roth IRA and a 401K?  My current work provides nothing really, so any retirement related investing would be solely on me.

Gin1984

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Re: Pay off Home Equity Line of Credit, vs investing- what would you do?
« Reply #11 on: April 06, 2014, 03:54:14 PM »
Thanks for all the ideas to think about, keep em coming :)  So far I'm leaning towards either 50/50 split, or paying a bit of a higher amount then I was, with all the rest going towards investing.  Hmmm....

Question- in terms of other places to keep money, such as tax efficient/Roth IRA's, etc, are you saying I should have both a Roth IRA and a 401K?  My current work provides nothing really, so any retirement related investing would be solely on me.
If your work provides nothing, then you don't have access to a 401k.