Key Points:

• HELOCs are a good option for homeowners, especially seniors, to access cash without selling their home.
• Rates are reasonable and can be used to invest in higher-yield assets.
• Start by checking with your mortgage-holding bank for the best terms.
• HELOCs can unlock substantial money for investors, and so can these two dividend legends to buy and hold forever

Lee and Doug discuss the benefits of Home Equity Lines of Credit (HELOCs), particularly for seniors or those nearing retirement who want to leverage the equity in their homes without moving or refinancing their low-interest mortgages. They note that while HELOC interest rates are generally higher than mortgage rates, they are still manageable and can be a good source of cash. The conversation also touches on the potential of using HELOC funds to invest in dividend-yielding stocks or bonds, creating a small arbitrage opportunity where the investment’s yield could exceed the HELOC interest rate. They emphasize that the first step in obtaining a HELOC should be to contact the bank that holds your mortgage, as they are likely to offer better terms than a new lender.

Transcript:

Tell me about HELOCs.

The home equity loan.

And companies love those.

But we’ve recently talked about the reverse mortgage, which we don’t feel is the best way to go about it.

Especially now, if you’re a senior or approaching 62 in that ballpark, if you want to take advantage and you don’t want to move because you can’t replace the 2.75% loan you have, if you’ve got a bunch of equity in your house, you can go in there now and probably get a reasonably good home equity loan.

The interest rates on these, I understand they’re higher than many mortgages, but typically because it is being backed by the equity in somebody’s house, typically the rates are okay.

I don’t want to say they’re not usurious, but they’re not like a 22% American Express.

Oh, no, no, no, no.

And again, so many people have got so much equity in their home, especially older citizens, you know, people in their late 40s, late 50s.

If you’ve been in your home for 10 or 15 years, you’ve got a lot of equity probably.

And especially if you’ve been the owner of a cheap loan for the last, I mean, interest rates were historically low for over a decade.

I know.

Anybody that still has those mortgages, you know, can go in there and leverage it up and get a home loan.

And there’s a really good chance that because of the nature of how the housing market has been, that home equity will stay moving solidly higher over the next five to 10 years.

To me, that’s the attractive part about this is if you were going to gamble and say, is the housing market going to collapse in the next five years?

Or is it going to at least creep up?

Let’s not be aggressive and say it’s going to be 10% a year, which it seemed like it was for a couple of years.

Even if you’re going to see it go up 10% over the next five years, this is still, to me, it’s a really great way to come up with some cash.

Yeah, it really is.

And especially as interest rates have gone higher, even if you just wanted to take that money and put it into bonds or whatever, I mean, you’d probably be down, you know, in terms of what it is on the loan versus what you could get.

Or if you used dividend-yielding stocks that were higher, you could very easily do almost like a little carry trade on your HELOC and take that money and buy something that pays something that would be equivalent to that interest.

So, yeah, I mean, think about it for a second.

You and I could go buy some Altria.

Yeah.

I don’t know where it is today, but let’s say it’s an 8%.

It’s almost an 8% yield.

Right.

You and I might be able to do a little arbitrage there.

Yeah, absolutely.

It’s almost like a little carry trade because you take that money, taking the equity out of your house, and you buy something that yields 100 basis points to 200 basis points higher.

And if you could buy Altria, which is a good example, at an 8% yield, and let’s say your loan was even a 7, let’s say it was as high as a 7, you’d still be clear on 100 basis points a year.

And would you have stock risk on Altria?

I guess so.

You can always go in and sell covered calls on the position as well.

I think somebody who buys Altria for this reason probably isn’t going to look at the price anytime soon.

I mean, if you’re using it for this kind of arbitrage, you’re probably just looking at the yield.

But, you know, you make a good point.

You could be like a hedge fund manager in terms of, you know, how your taxes are treated.

You could say, gee, I took a loan on my home and I’m now like Ray Dalio.

I’m a big-time hedge fund manager.

But I’ve got to tell you, for those tuning in right now, this is not really a bad idea.

You check with your bank.

I’ve done this before.

And just so you know, the place to go is the bank that holds your mortgage.

They do not want you to do this with another bank.

No.

They want you to take the mortgage and they want you to roll it into one loan together.

They want to have a blended, you know, you pay a blended interest rate on it.

And the chances you get a better deal than if you went to a separate bank, they’re probably pretty decent.

So if I were anybody going to do this, the first place I would go if I had a mortgage was to the bank that holds my mortgage.

Yeah, the bank or in some cases, there’s mortgage companies like Rocket and people like that.

Right.

Yeah.

Who immediately hit you asking you if you’d like a HELOC after you closed your loan or whatever.

And yeah, I think it’s a decent idea.

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