Talk me down...

[noppenbd]

Ok, I need some psychological advice. Since I'm too cheap for a shrink, I thought I would ask you guys. Am I crazy? I am considering pulling $7K out of my HELOC (prime-0.5% variable, currently 4.5%) to make my and DW's 2008 Roth contributions early. If I don't do this I will continue to make $500 contributions biweekly through December. I guess it is market timing but I feel like the market is poised to jump soon. HELOC payment will be $26 a month, tax deductible (25% federal bracket). Comments/criticisms?

[sweeps]

My personal opinion... I think it crosses the line from investing to gambling. I would continue my regular contributions and leave the home equity alone.

[disneysteve]

Let me ask you this. Would you invest your 2008 Roth contribution in a mutual fund with a 4.5% load? If the answer is no, then your plan doesn't make sense either.

[noppenbd]

Originally Posted by disneysteve

Let me ask you this. Would you invest your 2008 Roth contribution in a mutual fund with a 4.5% load? If the answer is no, then your plan doesn't make sense either.

Yeah, that is what I needed to hear.

[humandraydel]

Sweeps and Steve - correct me if I'm wrong, but I thought both of you agreed that someone with a mortgage @ 4.5% should not prepay the mortgage and should instead invest? This is no different. The only problem is that the HELOC is variable - that would make me hesitant.

[sweeps]

The 4.5% load isn't a valid analogy, in my opinion. That is an example of overpaying to invest. This is a matter of interest rate arbitrage... a perfectly acceptable strategy.

However, HD, to answer your point. It's splitting hairs I agree. But the difference to me is that noppenbd doesn't have the available cash flow now. He's accelerating beyond his natural investing capability. And, as you mentioned it's a variable rate. If interest rates go up fast, he's going to get the double whammy -- the HELOC is going to go up and his stock investment will likely go down.

[disneysteve]

Originally Posted by sweeps

The 4.5% load isn't a valid analogy, in my opinion. That is an example of overpaying to invest. This is a matter of interest rate arbitrage... a perfectly acceptable strategy.

However, HD, to answer your point. It's splitting hairs I agree. But the difference to me is that noppenbd doesn't have the available cash flow now. He's accelerating beyond his natural investing capability. And, as you mentioned it's a variable rate. If interest rates go up fast, he's going to get the double whammy -- the HELOC is going to go up and his stock investment will likely go down.

I agree. I think there is a fundamental difference between keeping a loan you already have and taking out a new one for the sole purpose of investing the money.

[Broken Arrow]

Originally Posted by noppenbd

I guess it is market timing but I feel like the market is poised to jump soon.

Besides the finer points of trading on margin, I would add that there is no guarantee the market will jump quite the way it has done historically.

The down market appears to be long and shallow, and although I'm not saying that this is what will happen, it's also possible that so too will be the recovery towards a bull market.

And if it turns out to be long and shallow, it is very possible that it may not be enough to off-set the interest you pay to make this worthwhile.

[MonkeyMama]

Originally Posted by humandraydel

Sweeps and Steve - correct me if I'm wrong, but I thought both of you agreed that someone with a mortgage @ 4.5% should not prepay the mortgage and should instead invest? This is no different. The only problem is that the HELOC is variable - that would make me hesitant.

I disagree with them. I would borrow at 4.5% invest personally. I do see no difference really.

BUT this situation is very different. For one OP has a variable rate.

OP also wants to borrow simply in an attempt to time the market.

For both of those reasons I would have no desire to go that route.

[sweeps]

Well, there is a difference.

When the question comes up... Should I pay down my mortgage or should I invest in stocks? One can infer that the person has cash on hand NOW to make that choice.

If someone is asking... Should I take a home equity loan so I can invest in stocks? The inferrence is that the person does not have available cash now. He's buying on the margin. And while I think the strategy will win a majority of the time, when you lose you lose BIG. That's why I'm not a fan.

[MonkeyMama]

Originally Posted by sweeps

Well, there is a difference.

When the question comes up... Should I pay down my mortgage or should I invest in stocks? One can infer that the person has cash on hand NOW to make that choice.

If someone is asking... Should I take a home equity loan so I can invest in stocks? The inferrence is that the person does not have available cash now. He's buying on the margin. And while I think the strategy will win a majority of the time, when you lose you lose BIG. That's why I'm not a fan.

Yes, but my point is if you take on a bigger mortgage from the getgo, then you have more cash on hand.

SO what if you take a small mortgage and change your mind later? Wish you had invested more instead? In a lot of cases I Really see little difference.

ETA: I agree on not gambling with money against my home, but I would hardly see an investment like a ROTH, at my age (with 40+ years to grow) as a gamble. Something more what I Was thinking of why I would borrow.

[sweeps]

Yup, I agree with you. More background information is needed whenever these questions are asked.

Besides the variable interest rate and market timing issues, frankly it just seems like a hassle to me -- to go through the process of applying for a HELOC, likely paying an application and processing fee, and then maintaining and closing the HELOC later -- all so I can get money in the stock market a few months early.

[noppenbd]

Originally Posted by sweeps

Yup, I agree with you. More background information is needed whenever these questions are asked.

Besides the variable interest rate and market timing issues, frankly it just seems like a hassle to me -- to go through the process of applying for a HELOC, likely paying an application and processing fee, and then maintaining and closing the HELOC later -- all so I can get money in the stock market a few months early.

FWIW, the HELOC is already open. I have decided not to do the plan as it relies on market timing, which I basically don't believe in (even though I know the market is going to jump soon.

[humandraydel]

Here's a thought experiment for you:

Mr. Money has $200k invested in a diversified, tax efficient index fund portfolio. He is about to purchase a $200k home and has asked your advice. He can easily afford the payments on a $200k mortgage. What do you suggest?

A. Liquidate all investments and pay cash for house.
B. Put 20% down and finance 80%.
C. Finance 100%.
D. Put 50% down and finance 50%.

If you pick anything other than A, please explain how this scenario is different than someone doing a cash-out refinance and investing the money - assuming, of course, that they have the cash flow to easily afford the refinanced mortgage.

It is entirely possible that two people could have the EXACT same balance sheet - one put down less money and kept investments, another refinanced and invested - and yet you would call one of them appropriate and one inappropriate?

[maat55]

Originally Posted by MonkeyMama

Yes, but my point is if you take on a bigger mortgage from the getgo, then you have more cash on hand.

SO what if you take a small mortgage and change your mind later? Wish you had invested more instead? In a lot of cases I Really see little difference.

ETA: I agree on not gambling with money against my home, but I would hardly see an investment like a ROTH, at my age (with 40+ years to grow) as a gamble. Something more what I Was thinking of why I would borrow.

IMO, if you want more money to invest, buy less house and cars and toys and so on.

[disneysteve]

Originally Posted by humandraydel

Mr. Money has $200k invested in a diversified, tax efficient index fund portfolio. He is about to purchase a $200k home and has asked your advice. He can easily afford the payments on a $200k mortgage. What do you suggest?

A. Liquidate all investments and pay cash for house.
B. Put 20% down and finance 80%.
C. Finance 100%.
D. Put 50% down and finance 50%.

What would be the interest rate on the mortgage?

Just because the portfolio is in tax-efficient funds doesn't mean there wouldn't be tax consequences to liquidating the investments. There would be capital gains to pay for sure so Mr. Money wouldn't net 200K. He would also be left house poor with all of his money tied up in his home, which I wouldn't recommend. So I wouldn't pick A and I would never under any circumstances approve of C.

So what's the difference between B or D and doing a cash-out refi? With option B or D, you are keeping investments you already have and borrowing money to buy a house. With the refi, you are borrowing against your home's value to buy investments you don't already have. Maybe on the bottom line, it works out the same. It just feels very different to me.

I guess what would really decide it for me is if the person needed the investment performance to make the loan payments. If my portfolio crashes, I can still keep up my mortgage payments because they are made from current income. If someone borrowed from their equity to invest and could comfortably afford the loan payments no matter what happened to the investments, I guess there really wouldn't be any difference.

[LuxLiving]

disneysteve, educate me/us. Why would you never finance 100%?

[disneysteve]

Originally Posted by LuxLiving

disneysteve, educate me/us. Why would you never finance 100%?

I think that takes a big, unnecessary risk. Look at the current housing mess. People financed 100% of the purchase and then the value of the home dropped 10 or 15 or 20%. Now they are stuck in a home that is worth thousands less than they paid. They can't sell because they wouldn't get enough to pay off the mortgage. Even worse are the ones who used creative financing hoping to sell or refi before payments shot up, but that is a seperate issue.

If you bought a 300K home with 60K down and a 240K mortgage, even if the home dropped in value by 20%, you'd still be able to get out if you had to (assuming you could sell the place of course). If you bought that same 300K home with a 300K mortgage and the value dropped to 240K, you're screwed unless you can come up with that 60K on your own. I suppose if you kept that 60K invested somewhere and could access it if you needed to, that would work. Just not the way I would advise doing things.

I guess I'm just more traditional and conservative.

[Snave]

Let me throw a wrench into this and I would like your thoughts. Let's say it was closing in on the time allowed to contribute for 2008 and this same scenario was thrown out. So, by taking out money on the HELOC, you could make your 2008 contribution knowing that you could pay back the HELOC in a short time period (it looks like he said he could do it in a few months), but NEVER get the opportunity to invest in a ROTH for 2008 again. Does that change things? That is many years of tax free earning that you might not otherwise get back. Just a thought.

[disneysteve]

Originally Posted by Snave

Let me throw a wrench into this and I would like your thoughts. Let's say it was closing in on the time allowed to contribute for 2008 and this same scenario was thrown out. So, by taking out money on the HELOC, you could make your 2008 contribution knowing that you could pay back the HELOC in a short time period (it looks like he said he could do it in a few months), but NEVER get the opportunity to invest in a ROTH for 2008 again. Does that change things? That is many years of tax free earning that you might not otherwise get back. Just a thought.

I would do it. As you say, you can never make up for missed Roth contributions. In fact, the more I think about, the more inclined I am to say to go ahead and do it in the original scenario.