Links: Personal Finance: Annuities |
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Link ExchangeWould you like to exchange links? It's a great way to build traffic and improve your search engine rankings. Featured ArticleShould I Invest My Home Equity Loan?by David BerkyFollowing is an excerpt from an email that was sent to SimpleJoe.com: 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 |
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