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Question about investing with HELOC
Today we answer a viewers’ question.
Joe writes, “Have you seen any retirees with paid for homes consider opening a home equity line of credit (HELOC), draw down say 50% of the line and invest same in the market.
The HELOC rates are at historic lows and the interest is deductible. Could be a 5% plus pre-tax profit/ cash flow spread between the dividend income and interest expense.
Not sure that I want the risk and debt but curious if many people do same.”
With a home equity line of credit (HELOC), as long as you are making your payments, you are fine. The moment you miss a payment, however, all the legal agreement was on the side of the bank and not on the borrower’s side.
In general we don’t recommend HELOCs for anyone because of four main risks.
- Interest rates risk
- Market risk
- Credit risk
- Regulatory risk
Banks and HELOCs
Banks like HELOCs as they have the lowest default rates because people don’t want to leave their homes. From a credit risk, however, they can pretty much put whatever they want into a HELOC agreement. 99% banks will reprice your interest rates once a year or renegotiate it. But if your payments aren’t consistent, they can accelerate this increased interest rates.
How HELOCs can change
In 2008 and the real estate market dropped, many people would go into the bank thinking it would be a rate adjustment only to find the bank wanted extra collateral. Then their HELOC becomes a totally different type of loan.
These four risks can work against can work against you singularly or in combination. Now we are not saying HELOCs are bad. What we are saying is that you shouldn’t borrow against your house to go speculating in the markets. HELOCs are structured for an intended purpose and if you deviate from that purpose, there is more danger than pick up.
Thank you, Joe, for your great question. We ask all our followers to send us your questions and we will do our best to answer them as soon as possible in an upcoming blog and podcast.
Greg Powell, CIMA
Email Greg here
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fi-Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. fi-Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.