Hi Jeffry: ARBITRAGE - revisited.
** OT OT OT **
In my previous post, I mentioned that arbitrage is usually done by professionals with large amount of funds. In this post I am going to illustrate where a small investor can also do an "Arbitrage" by profiting from the Low interest rate and the Rising Stock Market .
DISCLAIMER: The following method is not a recommendation or a financial advice, it is posted for illustration purposes only.
Let just say one owns a house for many years. Current value $ 300K, and First Mortgage at a very attractive rate is $ 150K. So you have equity of $ 125K. If you don't do anything, you are just sitting on a goldmine while the caravan passes by. You can take advantage by doing the following:
a. Get Home Equity Line of Credit (HELC)80% of the value, so 80% Time 300K equals 240K minus 1st mortgage, that will let you have a line of $ 90K.
b. Currently you can get HELC with NO FEE, a teaser rate of 5 1/4% for the 1st 6mo and then prime + 3/4% ( that is a very very good rate), with no commitment fee for the 1st year, and then $ 50/year. No prepaym,ent penalty if you keep it for 3 years (in essence it costs you $ 100 for three years, even if you do not draw at all).
c. Draw $ 80K (leave that extra 10K alone), put in in your brokerage account, buy QQQ, and leave it alone.
d. You are paying interest on that 80K. You have to remit that interest every month, and not just tell them to add to the principal (I don't know why). What to do? Draw from the remaining $ 10K enough money to pay your interest.
e. Hopefully QQQ will grow faster than 15% year.
f. Is that some form of an arbitrage? You bet. You are profiting from the discrepancy of the rate of return of QQQ and the interest you are paying for the loan. Will it work all the time? No. During Carter era, this would be a losing strategy.
g. The beauty of the above does not stop there. HELC could be tax deductable (there are limitations to this, chechk with your CPA) offsetting ordinary income. Your QQQ held over 1 year is taxed as l/t cap gain. In essence Uncle Sam is helping you to finance it.
This is a great country or what?
Good Luck.
Paul |
