here is how leveraging equity might work.
Rick pulls out $200,000 at 2.75% interest only 10 year loan.
That is going to cost him $458/mo and a balloon payment of $200,000 10 years from now.
He puts that $200,000 in a dividend fund paying about $700/mo - (less 20% tax) so $560
(this fund is VWEAX - there are others, and it would be wise to split it between vanguard and blackstone div income funds)
now for 10 years he reinvests the net dividend, so each month the amount goes up -
using a compound interest calculator (3.4%/10y/compounded monthly) the brokerage account will have $280,000
and the home will have 10 years of appreciation value.
Meanwhile he would have paid about $55,000 in interest during that time. Which he could have been investing.
a monthly payment of $460 at 3.4% compounded monthly for 10 years is $65,000
Was the risk worth it for $15k + appreciation - probably not
=======================
scale the number up to a $500,000 loan.
Then take the market return ~8%, rather than a dividend fund @3-4%
Cost of capital $500,000 * 2.75 / 12 = $1150/mo -> $138,000
Loss of gain on the cost - 1,1150/mo @ 8% compounded monthly for 10 years ~ $72,000 less cap gains tax.
Gain on $500,000 @8% 10 years -> $600,000 less tax
Remember, this is the gain. The original $200,000 is still there and pays off the loan at the end.
figure on +$300,000 after tax.
========================
This is a rough estimate - when the taxes are due, vs the compounding makes a difference. Combo of LTG and short term.
It assumes that there is a surplus cash flow - and enough of an income stream and equity to qualify for the loan.
Market risk and fluxuations.
Here is an interesting one, should this be used to turn pre-tax money into post-tax money?
just up the IRA draw to pay the additional monthly load? it might be more revenue neutral that way
cause of the tax implications, and not that he is dying anytime soon, but passing money not in an IRA
works out better for the heir.
Rick pulls out $200,000 at 2.75% interest only 10 year loan.
That is going to cost him $458/mo and a balloon payment of $200,000 10 years from now.
He puts that $200,000 in a dividend fund paying about $700/mo - (less 20% tax) so $560
(this fund is VWEAX - there are others, and it would be wise to split it between vanguard and blackstone div income funds)
now for 10 years he reinvests the net dividend, so each month the amount goes up -
using a compound interest calculator (3.4%/10y/compounded monthly) the brokerage account will have $280,000
and the home will have 10 years of appreciation value.
Meanwhile he would have paid about $55,000 in interest during that time. Which he could have been investing.
a monthly payment of $460 at 3.4% compounded monthly for 10 years is $65,000
Was the risk worth it for $15k + appreciation - probably not
=======================
scale the number up to a $500,000 loan.
Then take the market return ~8%, rather than a dividend fund @3-4%
Cost of capital $500,000 * 2.75 / 12 = $1150/mo -> $138,000
Loss of gain on the cost - 1,1150/mo @ 8% compounded monthly for 10 years ~ $72,000 less cap gains tax.
Gain on $500,000 @8% 10 years -> $600,000 less tax
Remember, this is the gain. The original $200,000 is still there and pays off the loan at the end.
figure on +$300,000 after tax.
========================
This is a rough estimate - when the taxes are due, vs the compounding makes a difference. Combo of LTG and short term.
It assumes that there is a surplus cash flow - and enough of an income stream and equity to qualify for the loan.
Market risk and fluxuations.
Here is an interesting one, should this be used to turn pre-tax money into post-tax money?
just up the IRA draw to pay the additional monthly load? it might be more revenue neutral that way
cause of the tax implications, and not that he is dying anytime soon, but passing money not in an IRA
works out better for the heir.
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