I just posted this in a totally unrelated thread (of mine, so I wasn't hijacking it!), then thought maybe I should post a thread of its own:
I get a ton of pre-approved home equity-related offers, ranging up to $1,000,000+. I immediately shred them. Oh, they're from great companies, most of which I do business with (Bank of America, Citibank, Discover), with low rates (2% to about 4.99%). But hell will freeze over before I do anything that puts a lien on this property. So into the shredder they go!
I will admit, though, that I've had an idea--and I'm sure everyone here will yell "TERRIBLE IDEA!! Don't ever do it!!" Here goes: I have an annuity at AIG that I opened in 1986; it pays 4% interest. Period. It's not variable. I can add or withdraw funds whenever I want, no fees, no penalties--and NO INCOME TAX on withdrawals (on the principal) because it was all taxed prior to being deposited. So I'm thinking....what if I got $100,000 maybe $300,000 at 2% or 2.5%, put it in my AIG account, let it sit there earning 4% interest for awhile (how long, I have no idea--I haven't let it go that far!), pay it back--or not (let my daughter deal with it when I die by using the AIG money), and make some money? All of these offers involve 0% upfront costs--no fees, no closing costs, no....whatever kind of fees usually are associated with this type of loan. The downside? Having a lien on my house, which I currently own free and clear.
What do you think? Is this an awful idea?
@SoCalGardener wrote:I just posted this in a totally unrelated thread (of mine, so I wasn't hijacking it!), then thought maybe I should post a thread of its own:
I get a ton of pre-approved home equity-related offers, ranging up to $1,000,000+. I immediately shred them. Oh, they're from great companies, most of which I do business with (Bank of America, Citibank, Discover), with low rates (2% to about 4.99%). But hell will freeze over before I do anything that puts a lien on this property. So into the shredder they go!
I will admit, though, that I've had an idea--and I'm sure everyone here will yell "TERRIBLE IDEA!! Don't ever do it!!" Here goes: I have an annuity at AIG that I opened in 1986; it pays 4% interest. Period. It's not variable. I can add or withdraw funds whenever I want, no fees, no penalties--and NO INCOME TAX on withdrawals (on the principal) because it was all taxed prior to being deposited. So I'm thinking....what if I got $100,000 maybe $300,000 at 2% or 2.5%, put it in my AIG account, let it sit there earning 4% interest for awhile (how long, I have no idea--I haven't let it go that far!), pay it back--or not (let my daughter deal with it when I die by using the AIG money), and make some money? All of these offers involve 0% upfront costs--no fees, no closing costs, no....whatever kind of fees usually are associated with this type of loan. The downside? Having a lien on my house, which I currently own free and clear.
What do you think? Is this an awful idea?
I agree with the part of you who knows that it would be an awful idea to put a lien on your home, when you currently own it free and clear.
I really don't see much difference between using a HELOC to finance additional investment or using margin trading; both will allow you to increase your investments, but if the market heads seriously south, in one scenario you may be forced to sell your house and in the other scenario you may be forced to liquidate some investments. Personally I think both are bad ideas unless you're a professional trader AND are very lucky.
@tacpoly wrote:
Wait, so you're saying that you have an annuity that pays you 4% annually guaranteed. And that you can borrow up to $1M from your home equity for <<4%. Based what you wrote, where's the risk?
Yep, that's exactly what I'm saying. That annuity was the single best investment I ever made. I have my former employer to thank for that. He's the one who brought in the AIG guy who gave those of us who were interested his spiel, and I signed up immediately; money was automatically deposited via payroll deductions, and since income tax had already been paid, as I noted there's no income tax when I withdraw principal now.
In later years, when I had much more disposable income--and could afford to gamble a little--I played around (badly) in the stock market, and tried various other investments, including a Wells Fargo fund that did really, really well. But overall, that AIG account is far and away the best investment I ever made. I never tapped into it until my recent illness; thank goodness I had the money to pay those bills (greater than $100,000 out-of-pocket)!
As for the dollar amounts, my house is worth approximately $1.7M; the offers I've received state loan amounts ranging from $35,000 to $1,000,000 or more. When I'm playing this hypothetical plan in my head, I never go anywhere NEAR seven figures! I'm thinking in terms of what would be manageable, either by me or my daughter, when the time comes to pay it off.
The risk? I can't explain the fear I feel about having a lien on the house. Even though I'd KNOW the money was safely sitting in my account and could be paid back at any time, I'm just scared.
@iced wrote:You aren't being taxed on payments that come out of principal, but that 4% interest is going to be taxable when its withdrawn. Depending on the HELOC rate, state you live in, and income bracket you're at when that happens, this could be minimal returns or even a wash.
If you have the means to repay the HELOC and the time to wait it out, that extra income is likely better served going straight into investments that will return >4% over the long haul, and without the 2-2.5% interest rate eating into profits.
FWIW, these are not HELOCs, they're home equity loans. Since I have no experience with either, I'm not sure how important that distinction is!
I'm in California. If I left it for my daughter to deal with, I have no idea how income tax would factor in. If I REALLY decided to do this, my first stop will be my estate attorney's office. I wouldn't do anything that jeopardizes ownership of this property without consulting him first.
@iced wrote:
That's certainly a big piece of this. You're talking about throwing a lien on a property in return for gains that are unlikely to even beat the rate of inflation after interest and state/federal income taxes.
I don't pay any state or federal income taxes. I'm very lucky in that the way I planned my retirement (even though it came much sooner than expected), the majority of my income isn't taxable. For example, my monthly Social Security benefits can't be taxed. When I withdraw money from AIG, it can't be taxed (yet), and even when it can, it won't raise my taxable income to the threshold of having to file taxes.
But I am concerned about any possible tax implications a loan like this could create. Again, though, if I really wanted to do this, or if I actually got to the point of seriously considering it, my first stop would be an appointment with my estate attorney.
