Open Financial Discussion - who to talk to

Driven5 said:

RX Reven' said:

But, if I have a mortgage, I'll need to be more conservative with my investments in order to hold my risk level constant which, of course, means lower returns over the long haul.

The truth to this statement relies on the assumption that an individual has already reached their risk tolerance threshold.

I don't see it as a threshold, rather I see it as a sweet spot between being too conservative and being too aggressive.

Just like retirement, I don't think in terms of being 95% or 97% or whatever percent sure I've saved enough, rather I think in terms of the sweet spot between wishing I worked longer and wishing I retired earlier.

In reply to RX Reven' :

Semantics. Change 'risk tolerance threshold' to 'risk sweet spot', or whatever other feel-good name, and the point still stands.

Risk tolerance / sweet spot is a good way of looking at what I want to do.  I'm comfortable with the risk I've calculated.  I want to make sure there isn't any risk I'm NOT seeing. 

Thanks for all the discussion.  This is helpful!

In reply to PMRacing :

I suggest you look into Dave Ramsey, or we can discuss what happened to my mother-in-law circa 2008, or I can talk about some of the folks that my wife sees as a case manager at the hospital, or my dad paying 20 years on the farm that he inherited because it was mortgaged to the hilt.... I can keep going.
 

Please do not add risk to where you lay your head. I have seen the results.
 

All it takes is a minor change in law, an economic downturn, a health scare, a family crisis,... to upend your plans. 

Driven5 said:

STM317 said:

I'll gamble with some investment money, but I won't gamble with the roof over my family's head.

I've known some people with significant equity who actually kept a zero balance HELOC to help cover extended periods of unemployment. Having a large fund to tap into, without overly depleting their equity, actually provided them much peace of mind... But they wouldn't be able to tap into that equity to keep paying the mortgage and prevent being forced to sell, if they waited to apply for it until after getting laid off.

Ok, sure. But OP isn't talking about keeping a zero balance. They want to leverage their equity into other investments. There's risk there in any case, but that risk is heightened in the current environment.

STM317 said:

Driven5 said:

STM317 said:

I'll gamble with some investment money, but I won't gamble with the roof over my family's head.

I've known some people with significant equity who actually kept a zero balance HELOC to help cover extended periods of unemployment. Having a large fund to tap into, without overly depleting their equity, actually provided them much peace of mind... But they wouldn't be able to tap into that equity to keep paying the mortgage and prevent being forced to sell, if they waited to apply for it until after getting laid off.

Ok, sure. But OP isn't talking about keeping a zero balance. They want to leverage their equity into other investments. There's risk there in any case, but that risk is heightened in the current environment.

As long as the LOC is both sufficiently greater than the value to be used, and has a max that leaves sufficient equity in the house, it doesn't have to be zero balance to be used to hedge the risk of economic uncertainty. Say somebody had a $600k house with a $200k balance on their mortgage, and wanted to pull $100k for a moderately 'risky' business or investment opportunity. They could pretty safely pull a $200k LOC, which would leave them with an additional $100k SHTF 'roof over our heads' fund that they wouldn't otherwise have or qualify for after a job loss.

In reply to Driven5 :

Fair enough. My concern is that what may have been a $600k house 18 months ago could be more like a $550k house now, and still has a long way to potentially drop in value to return to normal levels of affordability. So you might think you have $400k equity based on recent history, but the appraiser might only see $350k now, and that might drop another $100k over the next couple of years as the full effect of the historic interest rate hikes are felt.

Pulling equity for other investments looks pretty appealing when interest rates are crazy low, everybody's Zestimate is climbing 10% per year or more, and companies are hiring and spending cash like they're at Mardi Gras. But that's not where we are at the moment, and it could get worse from here. For me, the timing is no longer right to do it.

In reply to STM317 :

The OP stated that the majority of the investment part of the LOC would be recoverable in the event of failure. So the risks here lie entirely in the non-recoverable minority portion of the investment after liquidation (little different than from savings) and the interest on the utilized portion of the LOC (little different than from other loans), which are both unaffected by home price fluctuations. Assuming those two risks are acceptably low, what exactly is more concerning to you about home prices dropping with an LOC vs without?