Financial & investment advisers please stand up.

[iGas]

Is it true that one can get a line of credit to use as down payment for a house mortgage?

Is it worth it to borrow from line of credit at 3.5% interest to use in stock market investment?

 

[woodie1]

Originally posted by: iGas
Is it true that one can get a line of credit to use as down payment for a house mortgage?

Is it worth it to borrow from line of credit at 3.5% interest to use in stock market investment?

What country are you in?

 

[OCGuy]

In the US, you only need 3.5% down. If you have to borrow that 3.5% because you do not have the ability to save that much, you should probably not be purchasing a home.

 

[Special K]

Is the line of credit a variable rate? If so, I would be very hesitant to invest it in the stock market. Interest rates are very low now, but they will have to rise sooner or later. The historical nominal long term average return of the stock market is ~11%, so if interest rates rise a few %, that doesn't give you much room for arbitrage.

 

[iGas]

Originally posted by: woodie1

Originally posted by: iGas
Is it true that one can get a line of credit to use as down payment for a house mortgage?

Is it worth it to borrow from line of credit at 3.5% interest to use in stock market investment?

What country are you in?

Canada, and the law is very similar to the US.

Bank willing to give me a $300K line of credit, and I'm trying to figure out the best way to leverage it.

 

[iGas]

Originally posted by: OCguy
In the US, you only need 3.5% down. If you have to borrow that 3.5% because you do not have the ability to save that much, you should probably not be purchasing a home.

In Canada we have to have at least 5% down, but most if not all banks would go with a minimum of 10% down and a median house here is $550K. I'm trying to leverage and go for 25% down, or use the line of credit to invest in stock.

 

[iGas]

Originally posted by: Special K
Is the line of credit a variable rate? If so, I would be very hesitant to invest it in the stock market. Interest rates are very low now, but they will have to rise sooner or later. The historical nominal long term average return of the stock market is ~11%, so if interest rates rise a few %, that doesn't give you much room for arbitrage.

Totally agree, however the bank of Canada reiterated it position 2 days ago of keeping the interest rate at the same level till June of 2010 possibly till the end of 2010.

11% - 3.5% = 7.5% gained or $22.5K from $300K.

Bank willing to give me a variable mortgage rate at 2.65% or 4.09% 5 year fixed rate for 35 year term.

Mortgage of $550,000 at 4.09% for 35 year term is $2453.64 monthly payment. Choosing the right location and house in my town should produce at least $2600 a month rent, possibly $2900 a month. I have to contribute at the most $300 a month for insurance/tax.

Historic average price increase in my town is 4.5% to 6% per annum.

$550,000 @ 5% gain per annum for 5 years = $701,955 - $550,000 = $151,955 net gain - ($300 * 12 * 5 = $18,000) (- realator, bank, and lawyer fees). Principle gain is not calculated into the equation.

 

[Special K]

Originally posted by: iGas

Originally posted by: Special K
Is the line of credit a variable rate? If so, I would be very hesitant to invest it in the stock market. Interest rates are very low now, but they will have to rise sooner or later. The historical nominal long term average return of the stock market is ~11%, so if interest rates rise a few %, that doesn't give you much room for arbitrage.

Totally agree, however the bank of Canada reiterated it position of keeping the interest rate at the same level till June of 2010 possibly till the end of 2010.

Well the ~11% figure I quoted you is an average value measured over decades. For a short time frame, it's really anyone's guess what the stock market will do, so it could go either way for you.

 

[iGas]

Is it worth the risk?

 

[vi edit]

A line of credit for stock is called a margin account. And you open it with the broker.

 

[iGas]

Originally posted by: vi edit
A line of credit for stock is called a margin account. And you open it with the broker.

It is a cash line of credit therefore interest rate is lower than the margin account line of credit that I can also get from my bank. And, unlike a margin account it doesn't have to cover shortfalls immediately.

 

[Elbryn]

Originally posted by: iGas

Is it worth the risk?

whats your plan if you invest the money in stocks and it drops 20% this year? if you're ok with that as a possibility, then you've got the guts to do it.

dont forget to include tax and transaction costs into your equation as well. say it works out to 20% short term capital gains tax. your 11% gain is really 8.8 - 3.5 = 5.3%

 

[IHateMyJob2004]

Originally posted by: iGas
Is it true that one can get a line of credit to use as down payment for a house mortgage?

Is it worth it to borrow from line of credit at 3.5% interest to use in stock market investment?

Ya .... banks stopped doing this about a year ago. It did happen. I pray it is not happening anymore.

Given the current Dow at 8400, now is a WONDERFUL time to borrow (AT A FIXED RATE) to invest. Then again, you probably don't know about proper investment and seeing how 90% of the people in this forum invest, you better learn on your own. These active traders just need to learn to sit on their hands and buy stocks like WFC when they are irrationally priced at $14. I already have an 80% gain on this buy. The only buy I have made all year. My costs so far are $9.99. I will hold WFC forever unless it gets irrationally overvalued (like $70 within the next 12 months).