Interest Arbitrage
FinancingInterest arbitrage is borrowing money at a lower rate and putting it to work at a higher return, keeping the difference. In the HELOC context it looks like this: draw from a first-lien HELOC at roughly 7% and deploy that cash into something that pays more — a private loan, a trust deed, or a real-estate deal yielding 10–14%. The spread is your profit.
How it works. You are borrowing at a known cost and lending or investing at a target return; the gap, minus any losses, is what you earn. It only deserves the word “arbitrage” if the higher return is genuinely reliable and the timing lines up. Otherwise it is simply leverage — and leverage cuts both ways.
This is not risk-free. You are borrowing against your home at a variable rate to chase yield. If the investment defaults or pays late, or if the HELOC rate rises above your return, the spread inverts — and now you are losing money on debt secured by the roof over your head. Only arbitrage returns you would trust with borrowed money tied to your house, and size it so a single bad deal can’t force a sale.
Example. An investor draws $100,000 from a 7% HELOC (about $7,000/year in interest) and lends it on a trust deed paying 12% (about $12,000/year) — a $5,000 annual spread, as long as the borrower keeps paying and the HELOC rate holds. If that borrower defaults, the investor still owes the $100,000 line.
See who lends this way in private money lenders and the short-term cousin in transactional funding.