Home Equity Line of Credit Question

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PANDA_IHB

PANDA_IHB

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I have read in several books that if you have a lot of equity in your primary home, it may be wise to borrow against it to put the money in a safe money market account, or in inflationary hedge assets. Again if interest rates rises and money becomes more and more difficult to borrow in the future, I am wondering if this may be a wise strategy to take a loan against your equity and invest it elsewhere. I am certain that I will lose equity in my house more and more in the following years so the equity that i may be able to borrow against my house will also go down as I wait longer. I am thinking if i can borrow at 7% fixed home equity loan and be able to make more than 7% elsewhere, it will be like arbitraging just like the banks do.



I am wondering if anyone who has a lot of equity in their home has already done this? I know it would be foolish to borrow against your house to buy a new car or a vacation to Europe, but to remove the equity out of the house to try to beat 7% seems like a viable option if you have decided not to sell your home during this down market. Would many of you agree with me on this?



Would you say this is a wise move to make now, assuming inflation will rise, rate to borrow will increase, and borrowing will be more difficult in the future? What do you think?



Panda
 
[quote author="PANDA" date=1218448795]I am thinking if i can borrow at 7% fixed home equity loan and be able to make more than 7% elsewhere, it will be like arbitraging just like the banks do.



I know it would be foolish to borrow against your house to buy a new car or a vacation to Europe, but to remove the equity out of the house to try to beat 7% seems like a viable option if you have decided not to sell your home during this down market.

Panda</blockquote>


And what if you end up making less than 7% or what if you have a negative return or lose the money?
 
The most wealthy people I know all own all of thier properties outright.



It may be suboptimal portfolio managment, but none of them seem to be hurting. Wonder why?
 
Isn't it possible for money market rates to be paying upwards in the 8 - 10% if inflation gets out of hand? Didn't this happen back in late 70s when money market rates were paying upwards of 16%? I am not talking about gambling with the home equity loan by dumping this money into financial stocks, but taking a 25 year home equity and putting it in a safe money market account and allowing it to compound interest. How likely is it that the money markets will pay in the upwards of 8 - 10% if our inflation gets out of hand. I am just looking for pros and cons of taking this action. I am wondering if i am not even be able to take this home equity loan in the near future because my gut tells me that it will extremely difficult for one to borrow money in the near as many more banks will go belly up. Also as my home value depreciates, the maximum home equity amount that i can take on this loan also goes down, but by removing this equity out, as my home value depreciates the equity is there for me to invest more in silver/gold/minig stocks/money market. I believe that the dollar will continue to depreciate so the banks are getting even more screwed in the future as they are getting paid back in worthless dollars. This is just a thought.



It is interesting that when Irvine homes prices become true bargains in the next several years, many will not have the cash reserves to buy or get the proper mortgage they need to purchase the home at such bargain prices. This is just what I am predicting.



Thanks
 
PANDA..stop while you are ahead. You have shown in other threads to be insightful, inquisitive, and smart...please don't go on with this thread as you will destroy everything you have built up.



But please carry on with your HELOC and re-investment plan...and when you do have enough money to afford internet service please fill us in on how things "went".
 
[quote author="PANDA" date=1218479023]Isn't it possible for money market rates to be paying upwards in the 8 - 10% if inflation gets out of hand? Didn't this happen back in late 70s when money market rates were paying upwards of 16%? I am not talking about gambling with the home equity loan by dumping this money into financial stocks, but taking a 25 year home equity and putting it in a safe money market account</blockquote>


Which money market account is safe? I am not an expert on MMAs, but I seem to remember that the rate on MMAs changes and there is no guarantee on the interest rate? Again I ask, what will you do if you make less than 7% or lose the principal?



[quote author="PANDA" date=1218479023] and allowing it to compound interest. How likely is it that the money markets will pay in the upwards of 8 - 10% if our inflation gets out of hand. I am just looking for pros and cons of taking this action. I am wondering if i am not even be able to take this home equity loan in the near future because my gut tells me that it will extremely difficult for one to borrow money in the near as many more banks will go belly up. Also as my home value depreciates, the maximum home equity amount that i can take on this loan also goes down, but by removing this equity out, as my home value depreciates the equity is there for me</blockquote>


No, the equity is not there. The equity has dissappeared as the property depreciates. What you will have is debt, not equity. Borrowed money is not equity and it is not capital. It is debt. And you still have to pay it back if your property depreciates or if you lose the money. HELOCs are recourse.



[quote author="PANDA" date=1218479023]to invest more in silver/gold/minig stocks/money market. I believe that the dollar will continue to depreciate so the banks are getting even more screwed in the future as they are getting paid back in worthless dollars. This is just a thought.



It is interesting that when Irvine homes prices become true bargains in the next several years, many will not have the cash reserves to buy or get the proper mortgage they need to purchase the home at such bargain prices. This is just what I am predicting.



Thanks</blockquote>
 
Speaking of Gold, I remember Graph feeling down that he should of bought during the dips like Awgee said. Graph, THIS IS YOUR OPPORTUNITY!!!!! BUY GOLD NOW!



Panda.
 
Panda, not to put to fine a point on it, but this is NUTZ.



7% + is HARD to make.



I think your goal should be to pay your house off, not pull

money out of it.



Did some investment type just cold call you and hypnotize you???



Money is a symbol that we manipulate for various good and

bad reasons. A symbol of value. A house is a pile of cinderblocks

and sticks. It is actual value. It is there. You can put any

price tag on it you want, it doesn't matter, it is real and you can still

live in it, whether the tag is a million or a dollar.



If you personally are going to start a factory and make widgets

that you think everyone will find irresistable, or you are the next

Bill Gates, have at it. But I don't think that's what you have in mind.



Once your shelter is paid for, or the payment is so cheap, you can

keep it up with a very low paying job, and you have 3-6 month's

savings, then you go on to the next step.



Lawyerliz throws hands in air.
 
[quote author="lawyerliz" date=1218489360]Or, maybe you were just funnin' us and we fell for it??</blockquote>


I also sensed the presense of lulz.
 
I looked at this at one time or another. Once you factored in the cost of a second or HELOC as well as even a minimal (or nominal) investment fund it was maybe 1% gain... if positive at all.



I can see how'd you want to raise as much cash as you can. But unless you are willing to pay extra to do it, then i'd just keep paying and keep saving cash normally.



Just paying off your house as fast as possible seemed the more sensible route (although you do have to weight it against any tax benefits you might depend on....) as well as a safe route.



Good luck

-bix
 
panda,



i think you're referring to the early 80s to mid 80s when volcker jacked up interest rates to combat inflation. the fallacy in such a strategy is you're assuming interest rates are going to 15% in a vacuum. if you had done what you're suggesting back then, you would been ecstatic about the eye-popping rate in MM or even savings accounts right? or maybe you would be kicking yourself for missing out on these broad equity returns?



S&P;Returns

1989 27.25

1988 12.41

1987 2.59

1986 15.32

1985 26.38

1984 1.41

1983 17.23

1982 15.12



or maybe you would regret not loading up on long-term treasuries -- imagine a risk-free double digit yield for the past 25 yrs and still have 5 yrs left on them. so even back then the strategy wasn't so compelling.



potentially a great idea in hindsight but unless you plan on predicting where interest rates are headed, and how stocks and bonds (your opportunity cost) are going to react, your only sure bet is reducing your debt. that's a guaranteed return so to speak.
 
Why is it otherwise bright people don't understand the terms:



Risk Capital

Working Capital

Equity



Or concepts like why they are different, why they are important, and why you shouldn't mistake one for another?
 
[quote author="no_vaseline" date=1218505601]Why is it otherwise bright people don't understand the terms:



Risk Capital

Working Capital

Equity



Or concepts like why they are different, why they are important, and why you shouldn't mistake one for another?</blockquote>


English, No_Vas. I need you to write in English. ;-)
 
[quote author="no_vaseline" date=1218505601]Why is it otherwise bright people don't understand the terms:



Risk Capital

Working Capital

Equity



Or concepts like why they are different, why they are important, and why you shouldn't mistake one for another?</blockquote>


Maybe because they're NOT BRIGHT and chase the PIE in the SKY theme.



Why ask why ...just ask WHY after they're bent over.
 
[quote author="EvaLSeraphim" date=1218506216][quote author="no_vaseline" date=1218505601]Why is it otherwise bright people don't understand the terms:



Risk Capital

Working Capital

Equity



Or concepts like why they are different, why they are important, and why you shouldn't mistake one for another?</blockquote>


English, No_Vas. I need you to write in English. ;-)</blockquote>


Fair enough. I'll be more clear.



You shouldn't go to Vegas and gamble with the rent money. And if that's a bad idea, borrowing from your home to do so is REALLY a bad idea.
 
[quote author="Astute Observer" date=1218487697]I had play similar game like Panda, but it was with 5% mortgage. That is, instead of paying off my mortgage quicker by sending in extra $50 or $100 a month, I put the money in saving account, and later into CD. But after doing that for several years, I only was able to get interest rate of >5% with WaMu in Sept. of 2007. I lost money overall. I guess if I use the money to buy gold, I maybe doing very well, but hindsight is always 20/20.</blockquote>


The US dollar is rebounding. Oil has dropped from $140 last month to $116. Gold is down from $1000 in Mar to $850. The Euro is down from .62 in Apr to .69. Real Estate is down 20% from last year.



For your plan to work, long term interest rates will have to double.



http://www.bloomberg.com/markets/rates/
 
[quote author="lawyerliz" date=1218489317]Panda, not to put to fine a point on it, but this is NUTZ.



7% + is HARD to make.



I think your goal should be to pay your house off, not pull

money out of it.



Did some investment type just cold call you and hypnotize you???



Money is a symbol that we manipulate for various good and

bad reasons. A symbol of value. A house is a pile of cinderblocks

and sticks. It is actual value. It is there. You can put any

price tag on it you want, it doesn't matter, it is real and you can still

live in it, whether the tag is a million or a dollar.



If you personally are going to start a factory and make widgets

that you think everyone will find irresistable, or you are the next

Bill Gates, have at it. But I don't think that's what you have in mind.



Once your shelter is paid for, or the payment is so cheap, you can

keep it up with a very low paying job, and you have 3-6 month's

savings, then you go on to the next step.



Lawyerliz throws hands in air.</blockquote>


Lawyerliz, it seems like everyone believes that this is a very bad move. I got the idea from a book i read "Missed Fortune" by Douglas R Andrew. Douglas says that the equity in your house is dead equity which produces 0% return and we should act like a bank by arbitraging. If we can borrow at 7% try to invest the money elsewhere to beat 7%. I agree there is no place i can guarantee that i can make more than 7% a year. I guess if one is certain that they can get more than what they are borrowing for it would be a good move. This is not the case for me. I think one of the biggest mistakes i made back in 2004 was borrowing too little at such a low rate, and trying to pay off my mortgage as fast as possible. In hindsite, i wished that i would of borrowed $300,000, not $100,000 at 4.25% back in 2004. I guess you learn from your mistakes. I think that i am going to chill and play it safe. Thanks to all who responded.



Link to the "Missed Fortune" Book.

http://www.amazon.com/Missed-Fortune-101-Becoming-Millionaire/dp/0446576573/ref=pd_bbs_sr_2?ie=UTF8&s=books&qid=1218513193&sr=8-2
 
That man should be put in prison for that advice.



I have an MBA in Finance. I gamble recreationally. I wouldn't take that gamble with a gun pointed to my head. There's so much nonsystematic risk I can't describe it. It might be optimized portfolio managment, but ultimately you'll be busto because markets crash from time to time.



If you absolutely/positively must prescribe to his theroy, never purchase anything and rent instead. If you have the disipline to reinvest the difference between what it would cost you to own and your rental expenses, you'll bury somebody who owned and tried any other stragety.



See IR's blog post today for how the math will likely work, and then consider the addtional risk you are taking on top of the Toppers already overexposed position.



Panda isn't happy or sad. Panda is infatuated with leverage. Panda is absolutely the same as those degenerate asain folks I play cards with. Hell, I might even play cards with him and not know it.
 
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