Search Engines
Yellow Pages
Living
Homes
Jobs
Cars
Faith
Shopping
Get Organized
Shopping
Local
Online
Getting Around
Air Tickets
Hotel Deals
Maps/Directions
Things to Do
Dining
Games
Movies
News
Local
World
Sports
Should You Invest Your Home Equity Loan?
by David Berky
Dear Joe:
My house is paid for and I am considering taking out a line of credit or getting a home equity loan for the full value
and investing it. I only trust muni bonds as being safe. They also yield at 5% an equivalent taxable yield of roughly
9%. Is this enough for the float? Other investments are too risky it seems, especially those paying more than 10%.
- Lou, New York
Regarding your home equity loan, the main factor I would consider is the interest rate on your home equity loan. If
your rate is at 4% or above, the return on a 5% muni-bond may not be worth the trouble.
Some will tell you that the interest you pay on your home equity loan is tax deductible, thus giving you a
"theoretically" higher rate. But actually, the money you receive from a home equity loan must be used for
improvements on your home in order to qualify for the IRS home mortgage interest tax deduction.
You may not be caught and most people probably aren't, but if you are audited and you claim that interest you may
get penalized.
But still the float amount is what you must concentrate on first.
For example if you have $250,000 that you can pull out of your home and invest and you can get 5% from
muni-bonds (and you are receiving this money monthly - your home equity loan payments will probably be
monthly), you would receive about $1042 each month.
But you will probably also have to pay a monthly amount toward your home equity loan. If the rate on the home
equity loan is 4% (so you are making money on the 1% float), the monthly interest on the home equity loan will be
$833 - giving you a profit of $209 each month.
Obviously if the float is greater (you can get a home equity loan for just 3% or muni-bonds for more than 5%) or
your home equity amount is greater, you can make more money. But you have to weigh the variables and see if the
result is worth the effort.
If the muni-bonds don't pay monthly, you will have to come up with the $833+ monthly home equity loan payment
from somewhere else. Or save it from the previous payment.
Also, you will want to make sure your home equity loan is not a variable amount; if it is, you will need to watch it so
that it doesn't go up high enough to wipe out your profits. With the Fed raising the rates lately, this would be a
concern of mine.
Hope this helps.
---------------------------------------------
David Berky is president of Simple Joe, Inc., makers of easy-to-use PC software featuring the world's easiest
accounting software, Income & Expenses. Visit the Simple Joe website at
http://www.simplejoe.com/incomeexpenses
