Using a Home Equity Loan to Invest
What is a home equity loan?
Home equity is a person’s financial stake in his or her home. A home equity loan allows you to borrow up to 125 percent of the appraised value of your home, less any existing mortgages. Consumers generally take out home equity loans for shorter periods than their original mortgages (five to 15 years versus 25 or 30).
Home equity loans have become increasingly popular in recent years. Low interest rates (typically higher than first mortgages, but not as high as other borrowing options) and the interest deduction are two reasons for this, but you should consult a tax advisor for the tax implications in your situation.
Lumps versus lines
There are two types of home equity loans: term (or closed-end) loans and lines of credit (open-end loans). The former is a one-time lump sum paid off over a predetermined time period, at a predetermined rate of interest. A home equity line of credit (HELOC) sets a maximum amount for the line and lets the borrower withdraw money up to that point, as he or she needs it. There are minimum requirements for paying back the principal — both in terms of time and amount — but the borrower can overpay (and then dip back in up to the maximum again). The interest rate on a HELOC is usually variable.
Is it wise to use a home equity loan to invest in securities?
Not necessarily. But, if you are financially stable, are not reliant on investment returns to cover your mortgage payments and are a knowledgeable investor, the home-equity gamble might be a way to secure low-interest money to use to invest in securities. Otherwise, it could be too much of a risk.
The risk is this: When you buy securities with mortgage money, the funds with which you’re investing are not your own. Mortgage-money investments that go sour take the collateral supporting the loan — the house — down with them. That’s a sad ending for the equity you spent your adult lifetime amassing. There are other options available if you want to borrow money to invest in stocks, and they don’t involve the risk of losing your home. Talk with your financial advisor to find out more.
Indeed, the NASD (the National Association of Securities Dealers), the world’s largest private-sector securities regulator, is so concerned with the practice that it is taking “enforcement actions” against brokerage firms that recommend this source of funds for consumers looking to invest.
If you’re still game, you need to look at the specifics on both sides of the transfer. For example, if the interest rate on your home equity loan is four percent, you’ll want to make sure the investment you’re moving to promises a return that’s at least a couple of points higher. If you’ve got your eye on growth stocks, remember that growth stocks offer no guarantee of growth. Government-insured programs, while not offering the same potential for returns, might be a safer bet.
Before making any investment decision, it’s wise to discuss the specifics of your own situation with a financial advisor.
Chris Navi
http://www.articlesbase.com/finance-articles/using-a-home-equity-loan-to-invest-83896.html
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My financial advisor wants me to get a $100,000 home equity loan and he will invest it. Good idea?
I would use part of the interest earned to pay the loan. I have $500,000 equity. My mortgage balance is $350,000.
stupid fire him today. very dumb. never borrow to invest money. never
look into paying that mortgage off…. and investing income in roth IRAs, and pre-tax retirement… and mutual funds.
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http://www.daveramsey.com
It’s not a bad idea if the return on the investment will be higher than the interest paid on the loan.
Will the investment be guaranteed?
Probably not a good idea to invest you equity in the stock market though.
Do your own research, don’t be pressured, it is your house on the line after all!
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sounds like a great way for him to make a commission fire him immediately!
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never borrow to invest money, its stupid because it will take years longer to pay off your house and you are putting steady and safe money (home equity) into risky investments, if you have a half million in equity you are halfway to retirement, don’t blow that over some silly risk to try to make a few extra bucks.
Fire your broker and get someone who actually understands money.
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What would the loan rate be and is it a fixed rate? What would be the return on the investment? Is it a guaranteed rate? If the return is substantially larger, then it might be worth your while. If the loan is not fixed and the investment isn’t fixed I would definitely say no. Also, what is your relationship with your adviser? How have their other recommendations panned out? With all of these questions plus others that I didn’t write, my gut feeling says no, don’t do it.
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Bad idea to risk your home equity like that, especially since 100K would burn up most of your equity.
Your advisor doesn’t sound like he’s interested in you, but rather in himself.
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that is some of the worst financial advice I have ever heard. UNless its a sure thing, which i doubt cause there is no such thing as a sure thing. If your rate on the home equity is say 8% then you need at least an 8% return on you invest just to break even, IF you get like a 12% return then your only making 4% return which is about the same as investing in a long term cd, question is it the return on investment worth the risk, in most cases if your paying interest and having to get a loan to invest its not worth it because the interest cost is too high and thus your rate of return has to be too high to cover the cost. The risk reward is just not worth it. I dont know of any investment that is gauranteed to return that high of a return. I guess if you really like the stock or investment and think it can beat the interest cost and its risk reward is worth it then go ahead and do it. But dont do it just cause your dumb financial advisor told you to do it, thats just bad advice and you may want to report him to the SEC, cause advisors should not be advising like that.
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I’d hesitate to do it, bud. It IS possible to leverage your investment with borrowed fujnds, depending if you have (a) a low, fixed-interest rate home equity loan (which is becoming harder to find), (b) a relatively medium-length time horizon of 5-15 years to invest (it would be a killer if the market went south for 2 or 3 years regardless of how good your advisor is, so you want time to have a chance to recover, and (c) he’s damn good at investing.
Look at it this way. Let’s say you DO lend him $100,000 and you borrow it at 6.5%, for example. You get an additional tax break on the home interest, which probably cuts your effective rate of borrowing to about 6% or so (depending on your tax bracket). Then, let’s say, your killer advisor friend says you can make an average 10% annualized on your money in an aggressive portfolio (remember he’s SAYING this…) In that best-case scenario, you are basically netting a profit (after paying the interest on the loan after taxes) of 4% or $4,000 on your $100,000 investment. THEN you’ll have to pay taxes on some of the ivnestment earnings (unless he puts you in some annuity product, which I suspect he will so he can make bigger commissions from the insurance company selling it to you…) That cuts your net return even more.
Do you REALLY want that much risk for that little overall reward?
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not only is it s dumb idea, its also unethical and against the law. they could lose their securities licenses as well. you should report them since theyre just looking for their commission off you and not trying to actually make you money.
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Sometimes it can be a good idea to borrow to invest. If you can borrow at 7%, say, and you can be confident of making 11% on your investments, then it might be good. There are investment strategies that can expect a 10-12% return, but there is a risk.
But the main thing is you have to trust this guy and what he is going to do with your money. You have to really trust him.
That said, you must be really sure that this guy knows his stuff and has a great track record to proove it. Don’t go by what he says. Check out everything he says first. He should give you a resume/CV/Qualifications and some references. Contact his references and ask them for references, etc. Contact his company and former companies. Check with the Better Business Bureau, your state’s Attorney General and the SEC to see if there are complaints against him.
If he comes off as the next Warren Buffet, THEN think about it. If he doesn’t, look for someone else.
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Are you sure your financial adviser is legal?
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In and of itself, investing borrowed money is not wrong or dumb- it’s called leverage. Professional traders and investors leverage themselves all of the time by using margin or by trading futures which are inherently leveraged instruments. That being said though, here are a couple of things you should know. First, even the pros don’t use leverage to the point that losses could endager their livelihood. i.e. they trade with money they can afford to lose abig chunk of without threatnening their sustenance. Second, 90% of traders and investors lose money in the long-run. i.e. only 1 in 10 actually make money, and much less than that can make a meaningful return at that. If your financial advisor was in the elite few percent that can make a good consistent return on money, he wouldnt be your financial advisor. He would be out there somewhere creating a hedge fund and managing millions.
So either way you look at it, baaaaaaaaaaaaaaad idea…. 1) You can’t afford to lose the borrowed money, so leverage is wrong in this situation and 2) There’s an extremely small chance that you advisor is actually good enough to make you a return that would make it worth the risk even if you could afford to lose the money, because if he could, he wouldnt be working as a small time financial advisor in the first place. Take advice from a professional trader: Fire him. he’s either dishonest or dangerously delusional.
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Yes.
If you trust him and his performance in the past is better than the interest rate the bank will charge you for the loan then go ahead.
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I agree with previous advice…Fire him.
Investment 101:
1. Investment is risky, that is why you get a higher rate of return.
2. Any spare cash, pay off debt first. (Mortgage is debt)
3. Keep enough cash for immediate expenses.
4. Only invest what you do not need.
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It all depends on how the money is invested. Putting the money in stocks and leaving it there is too risky.
To get an idea of what might happen you need to learn more about the stock market business. People such as myself trade stocks.
I also sell stocks I don’t own…wait until the price falls and then pick them up cheaper.
Not so go for the person that holds stocks!!
Check this membership site out and you’ll discover that the only way to do this is to trade…not hold.
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Membership Site:
http://tinyurl.com/2fu6lx
Nope. Generally a really bad idea, and you probably should fire him.
The ONLY possible exception would be if you have a VERY low interest rate on your home equity loan AND you can invest the money in RISK-FREE securities with a higher yield. The only truly risk free securities are U.S. government bonds. But it is highly unlikely you can invest risk free and borrow at a lower rate.
So I’d get a new advisor. Seriously.
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Its an idea, I give him that, however, heres a better one. If he really believes in his ability to make money,…tell him this.
"if a man speaks of his honor, make him pay cash,..and say" if you invest $50,000.00, I’ll invest dollar for dollar, ie.. that you’ll invest $50,000.00 as well." That way, whatever he makes for you he makes for him as well. However, what ever he loses for you, he loses for him too. Make since? This also makes both of you partners at 50% 50% so you both carry equal weight as well as equal power in making DECISIONS.
And, unlike a divorse, where the female gets most of the property, which she does not deserve, both of you get or give up whatever the results may be. Or, you might consider investing only 10-20 grand in someone who is currently developing a series of specialized interactive games for the internet, namely me, and when HP and Microsoft start marketing them world wide, you’ll end up super rich.
YOU ARE WELCOME! Thats it. A=A
Who is John Galt? and "may you never thirst" jesserahtaylor@yahoo.com
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the world of business hard knocks and the godfather.
oh. one more thing,…never mix business an pleasure together, for that is the path leading through darker and darker caverns, no pun intended ladies, although you how truth suffers from too much analysis.
What you describe is forbidden under Regulation T of the Federal Reserve. He could lose his license for recommending such a thing.
Fire him and fire another. This week!
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in the business a few years
Does that mean the house is worth 850k? or it’s worth 500k if you sold it and would only clear $150k max before sales commission/closing costs. If the second scenario is correct, it sounds like you would drop below the 80% equity ratio and would have to get Mortgage insurance
He’ll probably take a good chunk of that 100k for his commission. There’s no guarantees he’ll make money – he could lose it all with the wrong investment choices. You’d be better off doing nothing or investing that loan in more real estate.
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of course he does, because he will get a huge commission. do not borrow money to invest. the only person who gains is your financial advisor who has his best interest not yours. do not put yor home at rist. his advice is horrible and will only hurt you and profit him. home equity loans are running about 9%. can yo guarantee you will earn more than that to get ahead? is your home worth the risk? look at the news with the subprime problem…do not put your home unnecessarily at risk
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This is not illegal, despite several of the answers to the contrary, but it adds a lot of risk and cost to any strategy.
I do it, but I have been managing investments for over 30 years and I monitor my portfolio constantly. Unless you are a professional or this is a very special opportunity, don’t do it.
The part about "he will invest it" is the killer for me.
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