Re: Investment that's better than the prime rate?

I submitted a response to Zak too, for the record, but it looks like
it didn't make it.

Tad Borek <[EMAIL PROTECTED]> wrote:

> Ram Samudrala wrote:
>> I want to know if there's a low-risk mutual fund (or any other
>> investment device) that is strongly correlated to the prime rate and
>> produces a return that's equivalent or higher than the prime rate.
>> 
>> The reason is that I can get a home equity line of credit that tracks
>> at the prime rate (or lower), the interest for which I can deduct from
>> my taxes (and also reduces my effective tax bracket). Further, I can
>> put the money from the line of credit in a tax sheltered account and
>> let it grow tax-deferred.  

> How would you get the entire proceeds of the HELOC in a tax deferred
> account?

That's not possible. Let's just say that rather than paying down the
principal, I have the option of investing that amount into a tax
deferred account.

> The problem is, that's your profit: the small amount. Sure the tax
> deduction lowers your borrowing costs, but not to zero. You're
> laying out a scheme that just won't net much money unless you take
> on investment risk.

> Your deduction is gone after the first $100k of HELOC debt, so
> you're talking about an incremental return on at most $100k
> borrowed.

I'd just convert my current traditional mortgage to a HELOC (rather
than refinancing to another conventional loan with a fixed rate). I
believe this would be treated as a home acquisition debt and the
interest will be fully deductable (p8, column 1):

http://www.irs.gov/pub/irs-pdf/p936.pdf

So the way I see it, not only can I deduct interest up to the amount
of my old principal balance, but also another $100,000 (the fair
market value minus the current principal is greater than that amount).

> You want no-risk or at least low-risk so you're probably talking
> about squeezing a couple percent, at most, from the $100k. Is that
> really worth it? It's a couple thousand bucks, at most, and that's
> only if your incremental return shows up after tax and
> research/transaction costs. If it doesn't, you'd be that far in the
> hole. The payoff just doesn't seem to be there absent other reasons
> for accessing those funds.

It'd just be the interest I'd invest at a higher rate over a long
period.

> And what if your home drops in value, and you need to sell it -
> would that be a problem?

I have considered this and I don't think this is an issue (unless
something really bad happens in Seattle and no one wants to live there
anymore :).

Thanks.

--Ram