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DWKB

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Ok, talk me out of it:

Wife and I are taking on a kitchen remodel.

Contractor estimate of $40k. We have $37k in saving account doing nothing right now.

Got an offer for a fee-free HELOC from my bank (assuming my LtV comes in ok) to get the funds. Do not have a set rate yet, but it will be less than 5% I believe.

Tell me why I shouldn’t take out the $40k from the HELOC, put the $37k in an index fund and pay interest only payments for the next 10 years on the loan and hopefully earn more than that on my fund.
 

DWKB

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How do you feel about the value of our home, now and over the next 5-10 years?
I mean, my home will move as the National market moves and I’ve got a pandemic rate loan on it right now.

The real gamble is will the S&P generate more value in the next 10 years on that money than the debt I’ll invite on that interest only loan.

5% on $40k is around $2k a year, $20k overall. Will an S&P index fund generate more than $20k over the course of 10 years? It avg 8% lifetime and 14% the last decade.
 

82CardsGrad

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I mean, my home will move as the National market moves and I’ve got a pandemic rate loan on it right now.

The real gamble is will the S&P generate more value in the next 10 years on that money than the debt I’ll invite on that interest only loan.

5% on $40k is around $2k a year, $20k overall. Will an S&P index fund generate more than $20k over the course of 10 years? It avg 8% lifetime and 14% the last decade.

Yea... the odds heavily favor an investment into an S&P Index Fund. The danger with Heloc's is two-fold:

1.) The combined Heloc and first mortgage end up bumping too close to the value of the home, such that, should things go south (2008/2009 did happen) and your home value plummets, you could be find yourself upside down and without any equity...

2.) Some people get addicted to Helocs... and start using their home as a credit card. I think lenders and the laws have gotten much more discreet and careful about that though...
 

DWKB

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Yea... the odds heavily favor an investment into an S&P Index Fund. The danger with Heloc's is two-fold:

1.) The combined Heloc and first mortgage end up bumping too close to the value of the home, such that, should things go south (2008/2009 did happen) and your home value plummets, you could be find yourself upside down and without any equity...

2.) Some people get addicted to Helocs... and start using their home as a credit card. I think lenders and the laws have gotten much more discreet and careful about that though...

Gotcha,

not worried about the addiction. This is for a specific job and only that amount.

Our LtV for both Mtg and Heloc combined would be capped at 85% as that’s the banks restriction.
 

Devilmaycare

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I mean, my home will move as the National market moves and I’ve got a pandemic rate loan on it right now.

The real gamble is will the S&P generate more value in the next 10 years on that money than the debt I’ll invite on that interest only loan.

5% on $40k is around $2k a year, $20k overall. Will an S&P index fund generate more than $20k over the course of 10 years? It avg 8% lifetime and 14% the last decade.

Just YOLO it and put the $37k into GME or AMC. ;)

Two questions, will paying HELOC put a crimp in your monthly cash flow? Is your mortgage + HELOC low enough that when we see a correction in the housing market that you're not going to a mile underwater. I don't know if there's as big of a bubble there as there is here but it would be my main concern.

If both of those aren't an issue then I'd probably go with the HELOC and invest. You should make money with that over the 10 years. S&P has been doing >5%/year and you have the compounding effect that'll give you even more. The only real worry would be if something like 2008 happens and the entire market takes a dive.
 

DWKB

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Just YOLO it and put the $37k into GME or AMC. ;)

Two questions, will paying HELOC put a crimp in your monthly cash flow? Is your mortgage + HELOC low enough that when we see a correction in the housing market that you're not going to a mile underwater. I don't know if there's as big of a bubble there as there is here but it would be my main concern.

If both of those aren't an issue then I'd probably go with the HELOC and invest. You should make money with that over the 10 years. S&P has been doing >5%/year and you have the compounding effect that'll give you even more. The only real worry would be if something like 2008 happens and the entire market takes a dive.
If I mathed it out right, my monthly interest payment should be around $166/month. Currently paying an extra $100/month in Mtg principal that can offset that. So I’m on the hook for an extra $66 a month for the next 10 years.

If my home value plummets, I’m not sure how that would affect my financial situation outside of locking me into the home to ride it out. I’m in a great rate and we don’t plan on moving too soon unless catastrophe comes.
 

elindholm

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I wouldn't do it at 5%. Under Biden, I think it's reasonably likely that capital gains taxes will go up, which tilts the numbers toward spending your savings (whose growth would be taxed) rather than adding more debt. If you're prepared to make interest-only payments to the tune of $2000 a year, you can invest those funds in stocks instead. It's pretty unlikely that you'll catch up to the $37k you took out, but on the other hand you won't have a debt hanging over your head all that time, plus you'll get the benefits of dollar-cost averaging if you split that $2000 into monthly investments.

It's a tough call, but 5% is high enough that you would really need the market to be quite well behaved over the next ten years in order for the numbers to be solidly in your favor, and the downside risk seems pretty large to me. Have you leaned on your lender to try to get a lower rate? 5% is very high given the overall state of the economy. You say it's "fee-free," but that means they're getting their profit on the high interest rate. The overall numbers might be more favorable to you if you pay a little up front in exchange for a lower interest rate. Banks tend to offer lousy HELOC pricing and you'll probably get a much better offer from a discount broker if you have time to shop around.
 

dreamcastrocks

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I wouldn't do it at all. You'd be better off financing part of it.

Better yet, if you have a 401k that you can borrow from, that is a much better idea. You can pay yourself interest on the loan, instead of paying the bank.
 

BigRedRage

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Ok, talk me out of it:

Wife and I are taking on a kitchen remodel.

Contractor estimate of $40k. We have $37k in saving account doing nothing right now.

Got an offer for a fee-free HELOC from my bank (assuming my LtV comes in ok) to get the funds. Do not have a set rate yet, but it will be less than 5% I believe.

Tell me why I shouldn’t take out the $40k from the HELOC, put the $37k in an index fund and pay interest only payments for the next 10 years on the loan and hopefully earn more than that on my fund.
If you do this but can pay more than interest only payments while your wealth is building, it's a good idea. Liquidating savings is always the last choice IMO. Also, the 401k loan and paying back your interest to yourself is a good suggestion.

A lot hinges on your monthly budget and what you save monthly now vs with a HELOC or loan. Being able to put away monthly and retain liquid assets are always top priorities.
 

Folster

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One thing to consider is what you expect the market to return over the next 10 years. The market is considered by most analysts to have a pretty high valuation at this current point. We have a recent example of a lost decade starting with the dot com crash and ending with the financial crisis. I don't think many analysts are predicting double digit returns over the next 10 years for where we are right now. But who knows.
 

Finito

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Just YOLO it and put the $37k into GME or AMC. ;)

Two questions, will paying HELOC put a crimp in your monthly cash flow? Is your mortgage + HELOC low enough that when we see a correction in the housing market that you're not going to a mile underwater. I don't know if there's as big of a bubble there as there is here but it would be my main concern.

If both of those aren't an issue then I'd probably go with the HELOC and invest. You should make money with that over the 10 years. S&P has been doing >5%/year and you have the compounding effect that'll give you even more. The only real worry would be if something like 2008 happens and the entire market takes a dive.

my man

still sitting on my 1001 shares of AMC at a 10.66 average been diamond handing since March
 

elindholm

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still sitting on my 1001 shares of AMC at a 10.66 average been diamond handing since March

I think a lot of people hold meme stocks for the entertainment value, and not really as investments. You're down $30k over the past two months. That sounds like a lot, but if you didn't have a clear idea of what you'd have wanted to do with that money, it's not a big loss. The "enjoy the ride" style isn't for me, but I know it's appealing to others, so go for it! Even dogecoin is getting a bit of a dead cat bounce these days.
 

Finito

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I think a lot of people hold meme stocks for the entertainment value, and not really as investments. You're down $30k over the past two months. That sounds like a lot, but if you didn't have a clear idea of what you'd have wanted to do with that money, it's not a big loss. The "enjoy the ride" style isn't for me, but I know it's appealing to others, so go for it! Even dogecoin is getting a bit of a dead cat bounce these days.

I’m up 22k for the year on it. It’s not a meme stock and I don’t consider myself a meme investor I’m a regular retail investor.

as of close on Friday it’s up 697% on the year and citadel is literally losing a billion dollars a week trying to keep these shorted stocks down. have they covered there short position? Not a single cent. It has a 3-1 buy/sell ratio and the price is going down? Odd don’t you think. When the chairman of the SEC is on TV talking about dark pool abuse and naked shorts that’s big news.


IMO it’s the best play in the market
 

elindholm

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I’m up 22k for the year on it. It’s not a meme stock and I don’t consider myself a meme investor I’m a regular retail investor.

AMC is absolutely a meme stock. It's pointless to claim otherwise. You may believe that you are holding it for non-meme reasons, but it's still on everyone's short list of most prominent meme stocks.

as of close on Friday it’s up 697% on the year and citadel is literally losing a billion dollars a week trying to keep these shorted stocks down. have they covered there short position? Not a single cent. It has a 3-1 buy/sell ratio and the price is going down? Odd don’t you think. When the chairman of the SEC is on TV talking about dark pool abuse and naked shorts that’s big news.

Yes, there will probably be another round or two of the short squeeze game, but that's highly timing-dependent. And since you seem to be planning to hold for the long haul, a short-term price spike does you no good at all.

IMO it’s the best play in the market

It has posted losses for seven consecutive quarters, and unless tomorrow's earnings report is a huge surprise, make it eight. There's a good chance that they go bankrupt within three years. You're probably better off investing in Sears.
 

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