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]

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]

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]

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]

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]

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]

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]

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.