Should you use a Home Equity Loan or Line of Credit for Making Investments?

October 31, 2016

In all reality, you could make an argument either way, but if using a Home Equity product to invest is something you would want to pursue, there are some things you need to understand before making a decision.

The principles for using a Home Equity Loan or Line of Credit for investing are really the same as any other use of a Home Equity product, such as a home improvement or a vehicle purchase.

Understanding the Risks

Essentially, you don’t have enough money in your savings to purchase the investment, so you require a loan. There may be other reasons, but this is the most common. The question you need to ask yourself, as with any loan, is “Can I afford the loan payment?” Remember that you are using your home as collateral, so you do not want to default on the loan payments.

You also need to understand that interest on a home equity loan is going to decrease your investment earnings.

For example:

If your investment earns 10% annually and you pay 4% that year on the Home Equity, your yield will only be 6%.

If the Home Equity product has a variable rate and that rate goes up, it could further erode your earnings. Keep in mind, not all investments increase in value. Paying interest on a Home Equity to purchase a losing investment will further increase your loses.

The Bottom Line

If you understand the risks and are comfortable with them, then using a Home Equity product for investing is something you could do. However, if this would cause you to lose one night’s sleep, it is probably not worth it.

If you have more questions, visit our HomeLine page or if you’d like to speak with someone, give us a call at (717) 733.4181!