It’s time for a calculated risk.

Here I am, seven years in to my personal finance journey, realizing my relatively disciplined approach to our finances has caused us financial harm.

Allow me to share with you one of the most recent examples of how “doing the right thing” came to bite us in the butt:

In 2010 Girl Ninja and I decided we wanted to buy a house one day. We knew said house would probably cost us around $400,000. We knew amassing a 20% down payment was the financially responsible thing to do.

So we did exactly that.

We spent three and a half years throwing tens of thousands of dollars in to our savings account (late 2010 to early 2014). In hindsight this was absolutely the wrong financial move for a few reasons.

1. Instead of banking nearly all of my discretionary income. I could have saved half and invested half. My savings account was only earning me 1%, meanwhile the stock market during this same time increased by 60%.

2. Because we were adamant on waiting to buy a house until we reached the $100,000 savings threshold, we missed the bottom of the real estate market. Had we bought 1.5 years earlier, when we had about $60,000 in the bank, we still could have put down 15%, but saved probably $30,000 on the purchase price of our home.

3. And just like we missed the bottom of the housing market as we tried to hoard cash, we also missed the bottom in regards to mortgage interest rates. We locked at 4.125%. Had we bought a year earlier, our rate would probably be about 3.4%, saving us $120/month… every month …for thirty years.

 

Ouch!

 

So yeah, I thought I was smart by waiting to have $100,000 banked to buy a home, but that clearly wasn’t in my best financial interest.

Now I know you might be thinking to yourself “Ninja, hindsight is always 20/20.” 

You’re right.

 

But my foresight was also 20/20. 

In 2010 I was saying the crappy market didn’t scare me because I knew over the long run it goes up.

Pretty much everyone knew by 2012 the real estate market had probably bottomed and was on its way up. Here’s a blurb from one of my late 2011 articles

The housing market bubble burst in 2007/2008. It dropped hard and fast for a long, long time. Over the last 12 months, however, it’s remained pretty steady  and in my opinion is probably pretty close to a bottom (if not already there).

We knew that a 3.4% interest rate was the lowest in history.

I mean it’s like the real estate gods had aligned the stars perfectly telling anyone with a stable career and a decent income “BUY A FREAKIN’ HOUSE NOW!!!!”

I wish I listened.

 

Never again friends. Never again.

It’s time I start taking calculated risks in an effort to further improve my financial situation.

In the next week or so Girl Ninja and I plan to head to a local credit union and apply for a Home Equity Line of Credit (HELOC).

“BUT NINJA YOU ARE SUPPOSED TO HATE DEBT! Why would you consider taking out a line of credit” – You guys.

Diversification my friends.

I’m sick of my cash earning 1% in our savings account. The time has come to seek higher returns.

 

Our new plan is as follows:

…Keep no more than $10,000 in our savings account (this is about 3 months of expenses at current spending levels).

…Move all remaining savings in to my taxable investment account where I will increase my market exposure.

…Open up a HELOC as a secondary emergency fund. Gaining access to about $50,000 if needed.

…Profit.

You might be wondering why I’ve decided to use the HELOC as a back-up emergency fund instead of my Roth IRA, or even a 401K loan.

 

Again, the answer is diversification.

Let’s pretend I have a $20,000 emergency. My roof caves in. Or maybe that Unicorn I’ve always wanted to buy comes up for sale. Or maybe Girl Ninja is kidnapped by some Canadians and a $20,000 ransom is requested.

I can cover half of this emergency by liquidating my $10,000 e-fund. I could pull another $10,000 from my Roth IRA, or taxable investment account, without penalty. Or I could borrow $10,000 from my 401k at 2.25% interest.

But what if the stock market has been having a really crappy go at it? Say the Dow is down 25% on the year like it has been in the past.

You think I’m going to want to sell these stocks and lock in a 25% loss?

HECK NO!!!!

This is where my HELOC could actually be a blessing. It allows me to mitigate potential crashes in the stock market. I’d simply transfer $10,000 from my HELOC to my checking account. I’d rather pay 4% on this loan, over 25% in market losses any day.

 

“But Ninja, what if the markets are up 25% like they were in 2013.” – You guys.

Well then I borrow the remaining $10,000 from my taxable investment account and lock in that sexy appreciation.

 

Duh.

 

Just because we will be opening a line of credit doesn’t mean I have to use it. Just like you don’t have to use that credit card sitting in your wallet.

Opening up a HELOC, and diversifying my cash flow options, seems like a no brainer. I’m super pumped to finally be at a place where Girl Ninja and I can decrease our cash reserves, and ramp up our investment portfolio.

Now quit wasting time and go get yourself a HELOC. <—joking

 

What do you think of my plan? (bring it on haters)

What do you think about HELOC’s in general?

Have you reached a point, like me, where you’ve realized that your conservative nature has cost you big bucks?

24 thoughts on “It’s time for a calculated risk.

  1. I think it’s actually a pretty decent plan assuming just having the HELOC sitting there isn’t costing you a ton. I definitely wouldn’t recommend it for everyone (especially those who have had trouble with debt in the past) but obvs you’ll be responsible with it so I say good way to optimize your portfolio.

  2. Sounds like a great plan to me. Can you do a follow-up post to walk us through your experience getting a HELOC? Are there any fees associated with doing this? Does the credit union need to send out an appraiser, etc? Never hurts to have an extra line of liquidity.

    The new pictures of the house look fantastic by the way!

    • Also, have you considered re-financing your mortgage? I know it’s not a huge drop, but I’m seeing 3.5 – 3.625 refinance rates on 30 year mortgages right now, which will add up over 30 years. Might be worth doing this before you apply for a HELOC.

      • I have been watching rates. If rates dip down to sub 3.5% then we will definitely refi, but right now rates are around 3.75% and they break even point on these refis is a little longer than we would want.

        • Have you thought about doing a refi from a 30yr to a 15yr? Your payment might actually only go up 100-200, but you’ll be done a lot sooner with your mortgage. 15yr refi’s are reeaallllyyy close to 3% right now.

          • I just closed on our refi from 30 yr to 15 yr. Our interest rate is now 2.75% and it only costs us $40 more per month than our payments from when we bought our house last year. Seems like a great time to refinance!

        • Have you checked out online lenders like Amerisave? I put in Seattle, a house value of $400k, a loan value of $280k, a house, good credit, and using escrow and got a 3.75% rate with a $1,702.94 credit at closing. That would be an immediate breakeven point!

          I refinanced only about 6 months into my loan to go from 3% to 2.5% and it was worth it because they actually paid me about $200 to do it!

    • I will definitely dollow up once we go through the process.

      Only fees are for the credit check the credit union will run on Girl Ninja and I, so probably $100 total.

      I had a buddy just do this and he had two options for valuing his place. The credit union can do a simple appraisal by using something thats equivalent to a Zillow estimate (they dont come out to the property at all).

      Or we could pay to have the home appraised if we really wanted to try and maximize price. We wont do this as i dont care if the banks tool says our house is worth $370k, even if an appraisal would say its worth $400k.

      • Cool, looking forward to seeing that as a follow-up post. I bought a condo in Boston last year that I’m hoping on staying in for at least 4-5 more years. That being said my fiancee is already baby crazy and wants to move into the suburbs after we have kids.

        I’m sure we’ll compromise somewhere in-between, but I’m already thinking how I want to finance my future house. I have a lot of equity in my current place and also a decent amount saved up in a taxable Vanguard account. Ideally, I’d like to use a HELOC on my condo to purchase a house in the future and then pay it all off when I sell the condo, so I don’t have to sell all my taxable assets.

        Will be interested in a future post as I’ve never seen any good personal reviews on the HELOC process / how big of a line of credit they *actually* offer based on your equity. Reading articles on Bankrate, Marketwatch, etc isn’t the same as hearing it from a trusted source like you!

        • I plan on doing something similar when I want to buy a house in the future, which is hopefully at least 5 years away since I’m not remotely baby crazy.

          My research on HELOCs has been that most will only let you have 80% of your total property value borrowed. So if your house is worth $100,000, your mortgage loan + HELOC amount can total to a maximum of $80,000. I could technically get a HELOC for just over $200,000 right now. My plan is to open up a HELOC once my mortgage is fully paid off.

          I’ve been investigating a few different places to get a HELOC. My primary credit union has a current rate of 3.74% and will pay the closing costs, but there’s a $50 annual fee. It would be easy to get the funds though. The institution where I have my mortgage it would be 3.99% and they would pay all the fees, but I would have to use checks to get the funds? And another local credit union would be 3.74% with no annual fee, but I have to pay the closing costs. They also all have different maximum amounts. Chase seems to have a good deal – 3.75% plus a 0.25% discount if you have a Chase checking account, which would work out to 3.50% with a ~$15 annual fee.

          • BECU (the credit union) id use has no annual fee, no closing costs or origination fee, no credit check fee, and could possibly avoid an appraisal altogether. Thats what they tell me on the phone at least.

  3. This makes me feel GOOD about buying in Jan 2013 with 10% down (I found a lender that doesn’t charge PMI) at 3.35% instead of waiting one-two years to save up the other 10%. The market here in Portland is way up – I bought at the top of my (sane) comfort level, and there is very very little on the market at that price now – and a good amount of competition, too. My house would probably go for as much as 20% more than I paid for it!

    I’m mirroring you in other ways, though – I have 10k in a very boring account, and the rest of my non-retirement money I’ve got in VTSAX. I haven’t done a HELOC though – is there any circumstance under which the bank could close that account?

    • My understanding is that the HELOC is guranteed for something like 10 to 15 years. I’m not sure yet, but will follow up with a post once I’ve gone through the process.

  4. Have you thought about a Unsecured LOC instead of a HELOC? HELOCs though are cheaper in the interest rate, justly because they can take the house on default. Less risk on the default end while keeping the same benefits on the up end.

  5. I’d like to hear more about the taxable investments. investment firm, funds, expense ratios, asset allocations, long and short-term goals.

  6. I feel the same way. We waited to have 20% of the down payment but prices were already going up and house inventory was low. if we had purchased the year before with the less than 20% things would have been different. We would have had PMI for a year maybe….although we would have gotten rid of it immediately most likely. Hindsight right? Now we’re building up our taxable account and I’m debating keeping $10K or $20K as an emergency fund…..

  7. No haters in the comments – and not sure why you’d expect them. There are some people for whom a heloc is a terrible idea, but that isn’t you. You are at a point where you have a variety of good choices you can make, so you are choosing from an array of them.

    I get where you are coming from on these choices, but I’m not making the same ones, at least not yet. I still like having a larger efund, at the expense of less in investments. But i did pull the trigger on a house before my ducks were 100% lined up. Still no verdict on whether that was wise or not, but even if not, it was a risk we can handle with our budget/lifestyle/plans

  8. I think it is a great idea. A few years ago my wife and I set up a HELOC from the local Credit Union. 2.99% was the rate, with no annual fee. It was for emergencies only or if some crazy investment idea came up and I needed the cash without accessing any of my real liquid cash.

    Flash forward to summer of 2014 when we learn baby #2 is on the way and we just ended a major project in the house (aka depleted most of cash savings) and she decides to wants to move.

    I was able to convert that HELOC into a 20 year LOC at 4.99%. Yes, that rate burns, but it was the easiest and best way to get access to that cash without further depleting cash assets. The HELOC carried a lower rate, but I was worried about not maximizing my payments and then after 5 or 10 years that rate adjusting. It also made the decision easier to go LOC route knowing that property would be a rental and the tenant would be paying the bill.

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