rate arbitrage opportunity?

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Topic Author
bling
Posts: 395
Joined: Sat Jan 21, 2012 12:49 pm

rate arbitrage opportunity?

Post by bling » Thu Mar 26, 2020 6:39 am

my HELOC is prime - 0.75%. with the fed lowering rates to near zero, that puts my interest at around 2.5%, which is lower than my mortgage rate. seems like a no-brainer to draw my monthly payment from my HELOC and pay into my mortgage for the near future?

SteadyOne
Posts: 67
Joined: Fri Mar 22, 2019 5:26 pm

Re: rate arbitrage opportunity?

Post by SteadyOne » Thu Mar 26, 2020 6:45 am

bling wrote:
Thu Mar 26, 2020 6:39 am
my HELOC is prime - 0.75%. with the fed lowering rates to near zero, that puts my interest at around 2.5%, which is lower than my mortgage rate. seems like a no-brainer to draw my monthly payment from my HELOC and pay into my mortgage for the near future?
Unless you can pay off the whole lien, so you have no principal then may be, assuming prime stays that low for a long time. Why not refinance the mortgage?
“Every de­duc­tion is al­lowed as a mat­ter of leg­isla­tive grace.” US Federal Court

Topic Author
bling
Posts: 395
Joined: Sat Jan 21, 2012 12:49 pm

Re: rate arbitrage opportunity?

Post by bling » Thu Mar 26, 2020 6:47 am

SteadyOne wrote:
Thu Mar 26, 2020 6:45 am
bling wrote:
Thu Mar 26, 2020 6:39 am
my HELOC is prime - 0.75%. with the fed lowering rates to near zero, that puts my interest at around 2.5%, which is lower than my mortgage rate. seems like a no-brainer to draw my monthly payment from my HELOC and pay into my mortgage for the near future?
Unless you can pay off the whole lien, so you have no principal then may be, assuming prime stays that low for a long time. Why not refinance the mortgage?
already did that. went from 3.875 -> 3.125. so we're talking about saving 0.625%, which admittedly is probably splitting hairs.

alex_686
Posts: 5861
Joined: Mon Feb 09, 2015 2:39 pm

Re: rate arbitrage opportunity?

Post by alex_686 » Thu Mar 26, 2020 7:15 am

The problem is that it is a variable rate. That variable rate could pop higher.

In the past I have done some shuffling around, moving 10k from my 1st to my 2nd.

lakpr
Posts: 4513
Joined: Fri Mar 18, 2011 9:59 am

Re: rate arbitrage opportunity?

Post by lakpr » Thu Mar 26, 2020 7:21 am

I would definitely take advantage of the opportunity. Perhaps three months at a time, and evaluate again. Meaning, I would take three months worth of mortgage payments from the HELOC, pay the primary mortgage, then repay the HELOC from excess cash flow.

If your mortgage holder is able to recast the loan if you prepay the mortgage, then I would extend that to 1 year of prepayment of the mortgage borrowing from HELOC. I doubt that the prime would move up within the next 1 year. It's admittedly a bet, but one that I think has a reasonable chance of paying off.

0.625% differential is not something to sneeze (pardon the pun in these days of COVID-19) at, it's the after-tax equivalent of what money market funds are earning now.

petulant
Posts: 1057
Joined: Thu Sep 22, 2016 1:09 pm

Re: rate arbitrage opportunity?

Post by petulant » Thu Mar 26, 2020 7:26 am

IBKR has margin rates at 1.62%. Would you take out a margin loan against your stocks to do this? Why not?

SteadyOne
Posts: 67
Joined: Fri Mar 22, 2019 5:26 pm

Re: rate arbitrage opportunity?

Post by SteadyOne » Thu Mar 26, 2020 7:38 am

bling wrote:
Thu Mar 26, 2020 6:47 am
SteadyOne wrote:
Thu Mar 26, 2020 6:45 am
bling wrote:
Thu Mar 26, 2020 6:39 am
my HELOC is prime - 0.75%. with the fed lowering rates to near zero, that puts my interest at around 2.5%, which is lower than my mortgage rate. seems like a no-brainer to draw my monthly payment from my HELOC and pay into my mortgage for the near future?
Unless you can pay off the whole lien, so you have no principal then may be, assuming prime stays that low for a long time. Why not refinance the mortgage?
already did that. went from 3.875 -> 3.125. so we're talking about saving 0.625%, which admittedly is probably splitting hairs.
If you can write a check for the whole amount of the first then in fact you will prepay your first lien and exchange a very low fixed for a variable mortgage hoping that that rate will stay low for the duration. It’s a gamble that you may take, but read the fine print.Some HELOCs have weird terms, like low rate now would reset to double of that in five years.
“Every de­duc­tion is al­lowed as a mat­ter of leg­isla­tive grace.” US Federal Court

MikeG62
Posts: 2501
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: rate arbitrage opportunity?

Post by MikeG62 » Thu Mar 26, 2020 7:48 am

When I had a mortgage I did something similar. Was around 2012 and mortgage had a few years left on it. Rate on mortgage was around 4.0% and rate on HELOC was 100bps lower. Wrote a check from my HELOC and paid off the remaining balance on my mortgage. Then paid off the HELOC over the next roughly two years in amounts approximately the same as I had been paying on my mortgage. This was at a time when interest rates were low and not likely to increase. Had they increased suddenly, I would have just paid off the HELOC with excess cash.

I think we are in a similar situation now - rates not likely to increase materially anytime soon. Not sure I would I pay off a mortgage with a HELOC if I expected to pay off the HELOC over a decade or more. But if it’s something you expect to pay off in a few years then might not be a bad idea.

So, it comes down to how long you plan to have the HELOC outstanding.
Real Knowledge Comes Only From Experience

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