Arbitrage opportunities worth taking are rare. Most arbitrage opportunties involve risk. A common arbitrage involves borrowing at lower short term rates and investing at higher long term rates while pocketing the spread. The risk is that short term loan rates rise higher than your long term investment rates and your borrowing costs exceed your investment income.

Another common arbitrage is to take advantage of fixed for life low rate balance transfer checks and invest the money at a higher rate. This often can cause cash flow problems due to the minimum monthly payment due on your credit card. There is excellent discussion about this particular take on this idea here - investing w/ credit line promo rates: strategies, FAQ , links, Ld1cf8f05d8be38e57bac691cd7a253da info, etc. RE making $$$ from credit . Once in a while you can find a guaranteed arbitrage where your borrowing costs are fixed below your investment return and you can manage the cash flow. Please post any other guaranteed arbitrage deals here.


Below are examples used in the original op.
Example #1
Take a Pen Fed 5/1 ARM at 4.250 with .375 in points paying $2,544 in closing costs ($750 in deductible points) Interest after 5 years is $40,648.

Invest $200,000 in Pen Fed 5.00 apy 5 year cd's and have $255,256 at the end of 5 years

55,256 in interest income
-40,648 in mortgage interest
- 2,544 in closing costs
_______
$12,604 profit

Issues, allocating certificates for deposit insurance (if similar to FDIC insurance), CASH FLOW, being able to close before cd rates go down.)

Example #2

Citibank Heloc 6 month intro 1.99% variable interest rate.

200,000 1.99v Heloc over six months =$1,979 in interest
200,000 ED savings account 3.25 rate for 6 months =$3,272 in interest.

3,272 interest income
-1,979 mortgage interest
______
$1,293 profit

Issues, no closing cost loan, but must refund Citibank their closing expenses if line is closed within 3 years, ED savings account rate may not rise as fast as the equity line rate(if it rises above your savings rate you can always just pay off the line with your savings account)

Example #3(expired Heloc now 1.99%)
Kinecta Federal Credit Union 0% 4 month fixed intro Heloc

200,000 heloc fixed for at 0 for 4 months
200,000 in Ed savings account at 3.25 = $2,175 in interest income

$2,175 interest income
- 150 2nd, and 3rd year fees
________

$2,025 profit

Issues, no closing cost loan, but must pay Kinecta $500 in closing costs if closed within one year, not available in every state, must satisfy membership criterion, $75 in annual fees if you don't have an average daily balance of $10,000.

slimcustomer said:

Example #1
Take a Pen Fed 5/1 ARM at 4.250 with .375 in points paying $2,544 in closing costs ($750 in deductible points) Interest after 5 years is $40,648.

Invest $200,000 in Pen Fed 5.00 apy 5 year cd's and have $255,256 at the end of 5 years

55,256 in interest income
-40,648 in mortgage interest
- 2,544 in closing costs
_______
$12,604 profit

.

You forget about tax. After paying tax on your interest income, you lose money.

And it takes too much work to make that money. You also take a hit on your credit record.

It is easier to just take advantage of arb opportunities in the stock or bond markets. Of course, you need tons of cash and a lot of experience to begin with. . . .

OP deserves more credit here.

First, OP starts by granting that "Arbitrage opportunities worth taking are rare.", and isn't saying any of these deals should necessarily be done--just that they are potentially interesting.

Second, tax issues RE mortgage debt also depend on whether you take the std deduction or itemize AND whether you record the interest as investment debt rather than home purchase debt (which it would legitimately be in the OP's hypotheticals.)

Third, there is another advantage to these type of opportunities that OP doesn't mention: they can serve as an emergency reserve fund. So, if I have a $200,000 mortgage and $200,000 in CDs, I have a huge emergency cushion in the form of the CDs, which are breakable. (Note that the same reserve-fund role can often be served by a HELOC.)

(Edit for typos)

nothin better than sticking a few hundred K in a bank account. Helps in all kinds of other financial deals. Lenders, businesses, etc LOVE to see you have substantial liquid assets.

kharvel said:And it takes too much work to make that money.It takes a lot of work just to breathe. If you're willing to breathe, why aren't you willing to profit?

What about arbitrage situations where you discover that an insurance company is way off in their projections on something like the life expectancy of inner city youth? Are there any great illiquid markets left? I remember seeing companies listed on the OTCBB with market caps of $500. It certainly seems like you could buy all the shares then set your ask price several times higher although I don't know if that would count as arbitrage. Another possible opportunity is the 6.25% rate mentioned here recently for overpaying certain taxes.

You can avoid the taxes by simply setting up a LLC to do all this for you. The interest is counted as an expense, the interest income is counted as income....so you only pay taxes on the actual "profit." - So, no tax issues!!!

Now, someone else said this may look good on your financials when going in for a loan or something.
That's what I was thinking. What if I do take the $200k loan but then also have $200k in the CD....it seems to balance out the assets/liabilities, but I suppose the difference is that the 200k loan is amortized over several years whereas the $200k CD is available whenever you want. You might have to forgo the interest and may have a slight penalty...but still having that much liquid cash is beautiful for any lender to see!...do you guys agree? or is having too much debt make it even worse?

Well, in that case, since lenders love to see cash even when there is an equal amount of loans (actually more considering big house loan)...then how can I get qualified for such a nice big $200k loan so easily so that I can take advantage of this arbitrage opportunity....while at the same time preparing myself to look good for the lenders because I will have so much liquid cash.

Thanks slim! I like seeing what the latest "best deals" look like and old posts are hard to find when I look at new topics first.

I see the original post as an open call to beat the 3 deals presented.