Taking a loan against your equity.

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QHSurfer_IHB

New member
Hello everyone,



This is my first post.



I currently own a towhhome in Quail Hills that is 100% paid off. I've seen some posts that the housing market in Orange County is expected to correct by 22% in 2009. If i am able to get a 30 year fixed mortgage for 4.75%, would it be to my best interest to take out an 80% mortgage against my townhome so that i can remove the equity out of the house in this falling housing market? I will preserve the equity taken out of the home into very conservative investments like the money market. It seems that many are renters here on the forum and I was wondering if other homeowners were thinking of such things as I believe the mortgage rates are going to be very low in the first quarter of 2009 and job security is an issue.
 
I'd probably do something someting between 40-50% and no more. Taking everything out is VERY risky at this point.... I'd take out as much as the money market or CD's can afford to replay the loans in interest, maybe a little bit more just to have some side cash.



Anyways good luck

-bix
 
Bix,



If we face inflation or hyper-inflation down the road (which i believe is unavoidable at this point of time), wouldn't it be cheaper to pay back the loan with inflated wages in the future? I am also assuming money market rates would be much higher in an inflationary environment. Assuming my tax bracket is 33%, my real mortgage rate would be fixed at 3.135% with a 4.75% 30 year fixed loan. I agree that taking 80% out may be too risky, but i do see an arbritrage opportunity here. I also believe that when you have cash on the side to pay off your entire mortgage at any time, it is the same as owning the home out right.



-QH
 
[quote author="QHSurfer" date=1230528320]Bix,



If we face inflation or hyper-inflation down the road (which i believe is unavoidable at this point of time), wouldn't it be cheaper to pay back the loan with inflated wages in the future? I am also assuming money market rates would be much higher in an inflationary environment. Assuming my tax bracket is 33%, my real mortgage rate would be fixed at 3.135% with a 4.75% 30 year fixed loan. I agree that taking 80% out may be too risky, but i do see an arbritrage opportunity here. I also believe that when you have cash on the side to pay off your entire mortgage at any time, it is the same as owning the home out right.



-QH</blockquote>


Welcome QH -



What arbitrage opportunity do you see?



If, for example, your townhome is currently "worth" $500K and you take $400K out, you will still have an asset valued at $500K. If the market goes down 20% (it appears that you are taking this into account) and you choose to sell the home at that point, the bank will still be owed the full $400K. You will eat the value drop, not the bank.



It appears you are just taking on transaction costs (buying and eventually selling a mortgage loan) to be able to beat an costing rate of 3.135% for that $400K. If you wish to do that, then by all means, proceed.



If you choose to liquidate entirely (sell) you can take your own money back, and allow someone else to eat the $100K equity loss, if you truly believe the prices will capitulate that much further. Why quibble over minnows with a shark under the boat?



I hope this helps. Good luck,

-IR2
 
I am a bit confused. Are you asking if it is a good idea to borrow money at 4.75% interest and put in a money market making 0% interest? I am not so familiar with money market accounts, but I thought they bought 90 day t-bills which are currently paying 0%.
 
[quote author="awgee" date=1230540717]I am a bit confused. Are you asking if it is a good idea to borrow money at 4.75% interest and put in a money market making 0% interest? I am not so familiar with money market accounts, but I thought they bought 90 day t-bills which are currently paying 0%.</blockquote>


I probably wouldn't put all of it in a money market fund. I was thinking about allocating 10 - 20% of the money i borrow against my home in oil and commodities. If prices do drop by 20% next year in Irvine, My equity in the house also drops by 20%. By removing the equity out of the home, I am sort of locking in the equity and investing that equity where i can get a better return than 4.75%. If inflation picks up which i believe will happen in the near future, money market rates will pay 5 - 10%. If you are invested in real assets that hold its value ( example: gold, silver, oil, and other commodities, the dollar based loan will become cheaper over time. Please correct me if my thinking is incorrect.
 
Maybe you should just pull out as much money as you can and give it to Peter Schiff's brokerage - Euro Pacific Capital, they have an office in newport beach. I think we are going to hand them over 50% of our money. Just finished reading his book, Crash Proof, and everything he said made sense to me.
 
[quote author="QHSurfer" date=1230553803][quote author="awgee" date=1230540717]I am a bit confused. Are you asking if it is a good idea to borrow money at 4.75% interest and put in a money market making 0% interest? I am not so familiar with money market accounts, but I thought they bought 90 day t-bills which are currently paying 0%.</blockquote>


I probably wouldn't put all of it in a money market fund. I was thinking about allocating 10 - 20% of the money i borrow against my home in oil and commodities. If prices do drop by 20% next year in Irvine, My equity in the house also drops by 20%. By removing the equity out of the home, I am sort of locking in the equity and investing that equity where i can get a better return than 4.75%. If inflation picks up which i believe will happen in the near future, money market rates will pay 5 - 10%. If you are invested in real assets that hold its value ( example: gold, silver, oil, and other commodities, the dollar based loan will become cheaper over time. Please correct me if my thinking is incorrect.</blockquote>


Perhaps I should be politically correct and try to politely point out how dumb this idea is, but awgee already tried that, and I don't think the message registered.



Do not invest with debt! Are you crazy? If you have a property that is already paid off, be thankful, and go about living your life. You will not find an investment that is going to make you more than the cost of the borrowed money without taking significant risk.



Do not do it. In fact, do not even think about doing it. You will regret it.
 
Blah... you bears are all too conservative with your money. You need to take risks to make money. How do you think people become rich? RISK! And, this is a no brainer, 4.75% interest is nothing when you can way better returns elsewhere.



So... QHsurfer, yank as much money as you can, then PM me. I can beat those lousy money market funds and those over-hyped commodities all day long.
 
[quote author="QHSurfer" date=1230553803][quote author="awgee" date=1230540717]I am a bit confused. Are you asking if it is a good idea to borrow money at 4.75% interest and put in a money market making 0% interest? I am not so familiar with money market accounts, but I thought they bought 90 day t-bills which are currently paying 0%.</blockquote>


I probably wouldn't put all of it in a money market fund. I was thinking about allocating 10 - 20% of the money i borrow against my home in oil and commodities. If prices do drop by 20% next year in Irvine, My equity in the house also drops by 20%. By removing the equity out of the home, I am sort of locking in the equity and investing that equity where i can get a better return than 4.75%. If inflation picks up which i believe will happen in the near future, money market rates will pay 5 - 10%. If you are invested in real assets that hold its value ( example: gold, silver, oil, and other commodities, the dollar based loan will become cheaper over time. Please correct me if my thinking is incorrect.</blockquote>


IMO, your thinking is correct. Your thinking includes the word <strong>IF</strong>. You said <em>If you are invested in real assets that hold its value</em>. The word "if" is a small word, but it is the most important reference in your thinking. The word "if" includes all the risk that you may lose your home and your equity, and who knows, maybe more. Please re-read IR's post above.
 
[quote author="skek" date=1230601352]Surfer, listen to awgee and IrvineRenter. You are not "locking in" any equity by taking on debt. The equity exists in the value of your home, when the value of the home declines, you've lost equity. You can only take on a lot of debt because you have an asset that is worth a lot of money, but if the value of that asset declines, you don't get free money, you still owe the bank the same amount of debt and interest. Plus, when the value of your asset declines to less than the debt you owe on it, it will make it harder to sell the house if you decide to do so. If there was an arbitrage opportunity where you could make more than you pay in interest, your plan might make sense. But if there were easy, no-risk returns in excess of 4.75% to be had, don't you think the banks would be investing in those opportunities instead of loaning you money?



Your plan does nothing to prevent the value of your house -- the real measure of equity -- from declining. All it does is add debt to your balance sheet. The only way to lock in the value of the home you own is to sell it.



Think about this. What happens if you implement your plan, then home prices in Irvine fall 20-30% AND the value of oil, commodities and equities fall 15-30% (while money markets continue to yield close to zero). How improbable is that in this economy? Well, if you'd implemented your plan a year ago, you'd be two for two and have dug yourself a deep hole.



Please read the blog posts and comments on this site. Your idea has led many thousands of Orange County residents to financial ruin. Don't be the next one.</blockquote>


Thanks Awgee, Irvine Renter, and Skek for your advice.



It seems that it would not be a wise move to take the equity out from my home and invest it in the market. Let me throw out one last question. What if i take out 50% of the equity from my home at a 4.75% fixed mortgage and rent out my place to a tenant. Wouldn't this be a much safer move as I would have removed $250,000 equity out of my home for a rainy day and my tenant would be paying off my principal and interest?



The problem i have is that more than 95% of my entire networth is locked into this home. I am also not sure how secure my job is at this moment.
 
Surfer, speaking as a property owner, keep the money in your house. Even though you may have paid a

premium on the property and its value is going down. It is more than just a property, it is a place to stay at very minimal cost

to you. You can argue about equity, preservation of equity and all the others pretty easily. But in the end, it is YOUR place.



How many people can say that nowadays?



I would only take it out equity as a last ditch effort. Since it is paid off, you can probably live on a mediocre job or unemployment.

Finding a job is not hard, finding a place to stay without means of paying for it... well that is a LOT harder to do. When you are comfortable

then I would rent it out for a nominal fee. This is what I did with a small place near UCI, it pays for itself with a nominal return of 12%.

Not great, but not that bad.



Anyways good luck

-bix
 
[quote author="QHSurfer" date=1230605763]



Thanks Awgee, Irvine Renter, and Skek for your advice.



It seems that it would not be a wise move to take the equity out from my home and invest it in the market. Let me throw out one last question. What if i take out 50% of the equity from my home at a 4.75% fixed mortgage and rent out my place to a tenant. Wouldn't this be a much safer move as I would have removed $250,000 equity out of my home for a rainy day and my tenant would be paying off my principal and interest?



The problem i have is that more than 95% of my entire networth is locked into this home. I am also not sure how secure my job is at this moment.</blockquote>


Surfer, it sounds like what you really want to do is take 50% of the money out of your house and invest it in something like <a href="http://seekingalpha.com/article/81244-macroshares-to-launch-levered-up-down-housing-price-etfs">DMM</a>. This is not a stupid plan, and would "lock in your equity", <strong>if</strong> (awgee's <strong>if</strong> here) your house's price is exactly correlated with the national case-schiller index. This is a hedge, not an arbitrage.



It's not clear to me whether DMM exists yet. I can't find a quote for it.
 
Let's go with worse case. You take out 50%. You lose 50% of the 50% and your home loses another 25% in real dollars. Now, figure out how much you have lost not only on the loss of equity, but also the loss on money you have to pay back. Add it all up.



If, <strong>IF</strong>, you think that re is a terrible investment right now, then sell the property. Invest the proceeds. Or buy a $250,000 property and invest the rest. Do the numbers using worse case scenario and look at the difference between borrowing to invest and selling to invest.



If the idea of selling and investing sounds risky, ask yourself why. This is not rhetorical. This is important. This is the make or break between making money on the investment or losing it.



I ain't just whistling dixie. We sold our home and invested the proceeds.



I think you are asking some very important questions and we can <strong>ALL</strong> learn from this.
 
[quote author="QHSurfer" date=1230523964]Hello everyone,

This is my first post.

I currently own a towhhome in Quail Hills that is 100% paid off. I've seen some posts that the housing market in Orange County is expected to correct by 22% in 2009. If i am able to get a 30 year fixed mortgage for 4.75%, would it be to my best interest to take out an 80% mortgage against my townhome so that i can remove the equity out of the house in this falling housing market? I will preserve the equity taken out of the home into very conservative investments like the money market. It seems that many are renters here on the forum and I was wondering if other homeowners were thinking of such things as I believe the mortgage rates are going to be very low in the first quarter of 2009 and job security is an issue.</blockquote>


If the QH townhome is your primary residence, you should rejoice that you've paid it off and not gamble with the roof over your head. Congratulations, with a paid off home you can afford to retire early.



If you're more than 20 years away from retirement, and absolutely cannot resist the urge to take $ out to play with it, consider taking out a lesser amount ($100k-$120k). Use the $$ as down payment on an income property, look for something around $300k-$360k and buy in late 2009 or later. Put 30%-33% down-payment and make sure the rental income breaks even or better. Make an extra payment every year so your 30-year loan will be reduced to 22. Hire a good property manager.
 
[quote author="awgee" date=1230618349]Let's go with worse case. You take out 50%. You lose 50% of the 50% and your home loses another 25% in real dollars. Now, figure out how much you have lost not only on the loss of equity, but also the loss on money you have to pay back. Add it all up.



If, <strong>IF</strong>, you think that re is a terrible investment right now, then sell the property. Invest the proceeds. Or buy a $250,000 property and invest the rest. Do the numbers using worse case scenario and look at the difference between borrowing to invest and selling to invest.



If the idea of selling and investing sounds risky, ask yourself why. This is not rhetorical. This is important. This is the make or break between making money on the investment or losing it.



I ain't just whistling dixie. We sold our home and invested the proceeds.



I think you are asking some very important questions and we can <strong>ALL</strong> learn from this.</blockquote>


Awgee,



I do not see how gold cannot appreciate against the dollar with all that is going on with our economy. My ideal scenario would be to take out $250,000 out of the house and invest all the proceeds into gold bullions and see gold prices double in 2009. Now i will be able to payback the $250,000 mortgage I have taken out of the home and also have $250,000 cash on the side. Again, we have the BIG "IF".



I can play it safe and certainly see my home value go down in value from $500,000 to $400,000 assuming Quail Hills sees a 20% drop by Dec 31, 2009. By 2010, if my towhhome goes down to $350,000, I would again be thinking "What if" I had done something back then. I really love my townhome, and would prefer not to sell it below what i had paid for it.
 
Isn't it possible for gold to drop as your housing drops as well?

You want to maximize returns while minimizing risk.

You are risking your homes equity on gold remaining at around US$880 / Oz. (www.kitco.com)



I don't think it's a good decision to gamble like that, but i'm pretty conservative.
 
Just friggin' sell the condo, bank or invest the cash, and rent something comparable. Worst case, it's a break-even scenario, i.e. rent will equal the depreciation on the condo. In the best case, probably $75-100K of equity is preserved...
 
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