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I am going to put solar panels on my roof. I can pay for those panels using some combination of the following

  1. Take out a HELOC at 3.75% variable interest rate with closing costs covered by the bank.
  2. Sell investments, stocks and/or bond mutual funds, from our after-tax brokerage account.
  3. Use up all of our savings account(s) earmarked as emergency funds.
  4. Take out a solar-specific loan at a 4.25% interest rate. I don't believe this loan would be tax deductible.

The options are listed roughly in descending order of preference. For instance, the solar-specific loan is almost strictly worse than the HELOC, since the latter both has a lower interest rate and it's tax deductible.

Therefore, the only interesting decision seems to be: If taking out a loan is arguably the same as selling a bond, should we just sell all our bond mutual funds?

3

I would undoubtedly sell the investments if they are positive, maybe even a little negative. That's what non-retirement investments are for, building wealth to spend, give, etc.

  1. Now you have a second mortgage on your home (risk) and whether deductible or not you're still paying interest on money that you don't need to borrow. Also, the interest is deductible from your taxable income not from your tax so you are still paying most of the interest.
  2. It seems to me that's what this money is for. You invested to grow your money for some reason. How about solar panels? You don't give numbers so I don't know if you need all of your investments, most or what in order to buy the solar panels. Regardless, I would most likely choose this route.
  3. No way! It's for emergencies! As soon as you spend it your A/C and heating system will fry and/or you or spouse will get laid off!
  4. It's debt (risk) and you're paying interest on money that you already have in investments.

Flipping things may put it in perspective. Would you borrow money or liquidate your emergency fund in order to invest in mutual funds?

If you can completely ignore risk then this MAY make sense. Let's say if you could borrow money at 3.75% and had a "guaranteed" investment return of 7.5% and a "guaranteed" source of income (job). But mutual funds (stocks, bonds) aren't even guaranteed to make money and they most definitely can lose and lose big. Also, I hope your job isn't in any way tied to the oil industry.

On the other hand, if you take a loan and fall on hard times you can liquidate your mutual funds to get out of the bind, but you are at the mercy of the market and the worth of your investments at that point. So it may come down to whether you want to choose when to spend your investments, when they are up or at some future date when they may be worth much less (or much more).

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  • I would absolutely borrow money to invest - if the return on the investment is higher than the cost of the money borrowed. In order to decide between selling the investment and taking the HELOC a comparison has to be made between the cost of the HELOC and the expected return on the potentially sold investment. – Raze Apr 30 '15 at 17:55
  • @Raze: If you ignore risk. See my edit. – AbraCadaver Apr 30 '15 at 18:09
  • I would borrow money to invest if the expected value of the investment was higher than the interest rate on the loan. – stannius Apr 30 '15 at 19:18
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    @stannius: Keys are "expected" and "ignoring everything else". But it sounds as though you've made up your mind already ;-) – AbraCadaver Apr 30 '15 at 19:25
  • Also, the stock market is at all time highs, so you're betting on it continuing to gain with no downturns in the time it takes you to pay back the loan. – AbraCadaver Apr 30 '15 at 19:27

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