Here’s an arbitrage case study. Though most think the principle of arbitrage is too sophisticated for them, it’s actually a fairly simple concept to execute. Take a look and make up your own mind.

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Transcript:   John and Mary had decided to use some arbitrage for the first time and they refinanced their home and they borrowed $50,000, and they were making $8,000 a year in payments. Now after tax, because you will be taxed on the interest that you receive if it’s not inside an IRA or 401k. Let’s say that they net $6,000. They do okay at work but they’re not huge wage earners. They have $500 a month after tax. They can take that $500, and since they don’t live up to their eyeballs with their lifestyle, they can add their own $500 to that and they can pay that loan off in just over 6 years, 6 1/2 maybe, 77 months. Think about that. In 6 1/2 years, they’ve attempted the time when that note might pay off, just going by the averages, which is give or take, 6 to 9 or 10 years. Look it, it’s random. Just because the average says 6 to 10 years, it could go 2 years. It could go 22 years. There’s no way to know. You have no control. Let’s just say that sometime in that normal 6 to 10 year range, that note pays off. They have cleared their condo. Look at all the options they’ve opened up all because they used a little bit of arbitrage where they borrowed money at way under 5%. They made 10% to 15% with that money. They paid a little tax on it each month. When it got paid off, they didn’t have to pay ordinary income taxes because it’s considered a long term investment so they got treated capital gains, only 15%. When you do that, what that allows you to do is simply add a page of options to your menu when it gets paid off or you get another page on your menu added when maybe the note hasn’t paid off, but because you’ve applied a little bit extra money from your own account to your loan and you’ve added that aftertax monthly payment from the note in addition to that, you’re paying off your home loan way more quickly. That means you can keep it that way, you can sell it, make a lot more money on your net proceeds check. You could borrow a lot more, maybe 2 or 3 times more than the first time. There’s all kinds of options, and the key to take away from this is anything we do, the number 1 goal at first is to create more options for the investor because the investor with the most options wins.