Now with that being said, let’s look at some actual numbers…..Jim, you suggest that if a HELOC has a rate of about 8% (in Canada we can get HELOCs at about 3.25%) you would need to have a rate of return of greater than 6%, let me show you why this is certainly NOT the case.

I am going to use even worse numbers than Jim did and let’s see how this works out. Let’s assume a HELOC rate of 10% and a rate of return of just 6%….how many of you would borrow money at 10% and invest it at 6%??? ….I would! Let’s take out a nice even number of $100,000.00 and assume we are going to pay 10% over 10 years….simple math says we will pay $10k per year in interest for a total after 10 years of $100,000.00. Now, in the US if you borrowed that money out of your home and in Canada if you invest it in a non registered investment, that money is tax deductible so if we assume a conservative tax bracket of 30% our actual cost of borrowing will only be $70000.00. Now we are going to take that same money we borrowed and we are going to put it in to an investment that is going to give us 6% for the same 10 years….if you plug that in to an investment calculator you will see it grows over 10 years to about $182,000.00. So now we have to pay back our original loan to the bank $182,000.00 – $100,000.00 = $82,000.00, factor in our cost of borrowing $82,000.00 – $72,000.00 = $12,000.00!!!! I have just made $12,000.00 borrowing at 10% and investing at 6%. The difference is simple vs. compounding interest….and if it works when the numbers are this backwards, think of how much better it would work when your HELOC rate is 3-4% and you can get 8-10% on your investments long term….

What I will say, is this is not a strategy for everyone!! I know when the markets went down in 2008 a lot of people would have lost sleep with a strategy like this and would have made an emotional decision and pulled out of the markets… I am personally using a strategy just like this and my investments were worth less than the debt I had (I put it in in 2007 so it was no shocker to me), however, after 2009 my investments are just about at par again….long term, the markets have always worked so I have no worries!

Joe
http://www.StingyFinance.com

Welcome to the 46th Carnival of Investing, hosted at My 1st Million At 33! Thanks to all the contributors to the carnival to make this another great carnival for more learning on investing your money, and thanks to Jonathan for making hosting arrangem…

I’d never pull money out of the house to play the stock market. But if my business ever needs more capital than I’ve got lying around, I’m not going to hesitate to do it for that.