I submitted a response to Zak too, for the record, but it looks like
it didn't make it.

Tad Borek <borekfm[at]pacbell.net> wrote:

- quote -

That's not possible. Let's just say that rather than paying down the
principal, I have the option of investing that amount into a tax
deferred account.

- quote -

I'd just convert my current traditional mortgage to a HELOC (rather
than refinancing to another conventional loan with a fixed rate). I
believe this would be treated as a home acquisition debt and the
interest will be fully deductable (p8, column 1):

http://www.irs.gov/pub/irs-pdf/p936.pdf

So the way I see it, not only can I deduct interest up to the amount
of my old principal balance, but also another $100,000 (the fair
market value minus the current principal is greater than that amount).

- quote -

It'd just be the interest I'd invest at a higher rate over a long
period.

- quote -

I have considered this and I don't think this is an issue (unless
something really bad happens in Seattle and no one wants to live there
anymore .

Thanks.

--Ram

Ram Samudrala wrote:
- quote -

How would you get the entire proceeds of the HELOC in a tax deferred
account?

- quote -

Rather than waste time talking about, say, getting on the other side of
some equipment leases, I gotta attack the fundamental premise here.
You're proposing borrowing short and investing at low risk in something
that pays the short rate plus some small amount.

The problem is, that's your profit: the small amount. Sure the tax
deduction lowers your borrowing costs, but not to zero. You're laying
out a scheme that just won't net much money unless you take on
investment risk.

Your deduction is gone after the first $100k of HELOC debt, so you're
talking about an incremental return on at most $100k borrowed. You want
no-risk or at least low-risk so you're probably talking about squeezing
a couple percent, at most, from the $100k. Is that really worth it? It's
a couple thousand bucks, at most, and that's only if your incremental
return shows up after tax and research/transaction costs. If it doesn't,
you'd be that far in the hole. The payoff just doesn't seem to be there
absent other reasons for accessing those funds. And what if your home
drops in value, and you need to sell it - would that be a problem?

-Tad

"HW \"Skip\" Weldon" <skip5700removethis[at]hotmail.com> wrote:

- quote -

Exactly. I'm looking for low-risk investments that track the
prime. Low risk is subjective, but I feel I can make a good decision
in this regard eventually if I had a variety of choices.

- quote -

It's certainly possible that I could re-loan the money given to me (at
prime, though I can get it lower) to someone who is willing to pay me
prime+0.5%, who has the same (or better) credit score, and who has a
more expensive house, with the same legal protections (in other words,
someone who is less of a risk than me since the bank is taking a risk
in loaning me the money).

This could be because I got a good deal and/or did research in finding
this loan.

I suppose you'd say that I'm taking a bigger risk than paying off the
loan to the bank, but I am getting a higher rate in return. This is
the kind of tradeoff I'm willing to make, and that is my question.

To give you an idea of what I consider low-risk:

Are stock markets (indexing, DCA) low-to-medium risk in the long (30+
years) term? I normally would argue "yes". I generally believe that
in 30+ years, the American economy will be doing great, and if someone
invests in an index fund today, they'd be seeing an average annual
return of at least 8% in 30+ years, maybe more.

I am however bothered by one thing about the stock market (convinced
by a friend of mine): people trade common shares based on perceived
value, not necessarily on whether there is a defined dividend (which I
think is a recent phenomenon). This reminds of a pyramid scheme of
sorts, and my concern is that the whole thing could collapse (and my
concern only arises because of the lack of dividends).

I might therefore, for example, consider a index fund that dealt
purely in preferred shares (but not an index fund that dealt in common
stocks and issued preferred shares) that tracked the prime rate.

--Ram

On Mon, 17 Nov 2003 07:16:17 CST, zhendsch[at]yahoo.com (zak) wrote:

- quote -


First, you're right. There's no "suspect" about it.

Second, the investor should understand that by its nature, a "low
risk" investment should outperform a "risk free" investment.

This is why many advisers recommend we compare like investments - low
risk to low risk, and risk free to risk free. We distort conclusions
when we compare dissimilar things.

If he does that objective analysis, he won't find a risk free return
that (net or gross) currently pays what the debt currently costs.

(If anyone does, please don't post it here where everyone can see it.
Call me, I'll make your dreams come true.) <grin
-HW "Skip" Weldon
Columbia, SC

Ram Samudrala <ram[at]sp1.compbio.washington.edu> wrote in message news:<bp8jo1$2g2u$1[at]nntp6.u.washington.edu> ...
- quote -

I suspect that the investment you are looking for doesn't exist, just
based on first principles. If there were a safe way to earn better
than the prime interest rate, why would the bank loan money to you?
They should just invest in wherever you find to invest the money.

Further, depending on your tax deferred vehicle, you probably only
have a limited number of dollars that can be contributed. Why would
you want to tie up your tax deferred savings in low yielding
investments? Similarly, a tax deferred account implies that you won't
have access to the investment returns to pay the HELOC, so why not
invest in something with more long term growth potential on the
assumption that you'll probably beat the prime over the long term.
(Actually I know why you wouldn't do this, my wife would kill me if I
invested money from a HELOC and didn't come out ahead).

Hmmm, I will speculate that there might be an insurance product that
can do what you want: a guarantee that something that is likely to
happen (investments beat the prime rate over the long term) will
happen seems like an insurance sort of thing. Over the long term, an
insurance company would almost certainly be able to beat prime.
Perhaps you could find a deferred fixed annuity with interest
guarantees tied to the prime rate, but you'll likely need to agree to
a long surrender fee period to get it (in other words make sure your
cash flow is good enough to make those payments without touching the
annuity money).

[ This is a repost of the following article: ]
[ From: Ram Samudrala <ram[at]public.compbio.washington.edu> ]
[ Subject: Investment that's better than the prime rate? ]
[ Newsgroups: misc.invest.mutual-funds ]
[ Message-ID: <bp6s8m$20hi$1[at]nntp6.u.washington.edu> ]

I want to know if there's a low-risk mutual fund (or any other
investment device) that is strongly correlated to the prime rate and
produces a return that's equivalent or higher than the prime rate.

The reason is that I can get a home equity line of credit that tracks
at the prime rate (or lower), the interest for which I can deduct from
my taxes (and also reduces my effective tax bracket). Further, I can
put the money from the line of credit in a tax sheltered account and
let it grow tax-deferred. This seems like a smarter thing to do than
to invest the amount I'd pay in interest directly into the
tax-sheltered account. I assuming this'll work out until I hit the
AMT...

So I'm looking for an investment device that is correlated with the
prime rate. In other words, if the prime rate goes up to 10%
(presumably a sign of a strong economy), I'd like my investment to
also be that high or higher.

--Ram