By Russ Gaiser
One question I get asked quite frequently is “Should I be looking at borrowing against my home to invest?” I can understand why. With interest rates at all-time lows and a bull market that is showing little signs of slowing down, it might seem like taking a loan against your home to participate in the market upside is a no brainer. With just a quick look at the numbers, you might already have the loan application open on your computer ready to go. But it might be wiser to take a step back and consider all the variables that go into a decision like this—including the not so obvious ones.
Close to Retirement?
One point to consider would be your proximity to retirement. If you have a lot of equity in your home or if it is paid off, chances are you are at least getting close to retirement. For most people, a comfortable retirement includes minimizing debt obligations and the payments associated with them. This includes personal loans, credit cards, and student loans, but also a mortgage.
Housing related expenses are typically the highest of all of these, so it is important to look at how borrowing against your home would impact your retirement plan. The question of “Do I want the extra monthly payment in retirement?” might be the more appropriate question to ask, rather than if you can simply afford the monthly payment.
Speaking of retirement, how is that 401(k) plan looking? Or that Roth IRA? If these accounts have been neglected, it would be prudent to come up with a plan to start contributing to (or maxing out) these tax-favored accounts before taking that loan against your home. Having a long term, consistent investing plan is crucial to long-term financial success.
If these accounts need a little TLC, or have simply been neglected, then borrowing against your home should be a back-of-mind consideration. If you’ve lagged behind in these areas, then I would be even more skeptical of investments, funded by cash borrowed against your home. Succeeding. Using your most powerful wealth building tool (your income) would be the best place to start.
Feeling strapped for cash? Take a look at your monthly budget and re-prioritize your spending.
Another important point of consideration has to do with your goals. What exactly is the point of the investment? Do you want to use the potential profit to pay for a vacation or a wedding? Or that Ferrari you’ve been dreaming about since you were a kid? Or is this consideration only a factor because the equity in your home feels like it could be put to better use, without any real goal? No matter the situation, be sure to have a clear understanding of your financial position.
Risk is usually the last thing that is on the mind of those who ask me about borrowing against their home to invest. I usually find myself having to play devil’s advocate in these conversations by asking the question, “What if you lose some, or all of your investment?” Top of mind for many who are considering this avenue is the potential profit they can make, which clouds the thought of what it would look like if the investment lost money.
It is important to understand that investing with debt magnifies the losses, because not only did you lose the money, but you must pay back the money you lost! Now imagine that your house was fully paid off, you are in your 50s, and you took a loan for half the equity of your home. If you lose that investment, you are now out of your investment and have a mortgage again, with nothing to show for it. Because of this, you might need to work longer than you wanted to, or you might have to alter your retirement lifestyle.
Let’s take it one step further and say that you can’t make the payments on this new mortgage anymore. Now you are at risk of foreclosure and have layered yet another level of stress onto the situation. When framing it this way, you can feel the weight of what might happen if things don’t work the way you planned. After all, risk isn’t measured in your head, but in your heart.
A good first step would be to ensure that you have a financial plan so you have a clear idea of your money goals and if you are on track to achieve them. This also helps you to focus on what the next logical step is in the plan – it’s easier to accomplish something when you are focused on it.
You also want to be certain that you understand how this decision would, or could, impact the other areas of your plan. While taking a loan against your home and using it to invest can theoretically work, it certainly isn’t for everyone, and I would argue, not for most people. If you are in a financial position where losing the investment wouldn’t jeopardize retirement, your lifestyle in retirement, or put you at risk of potentially losing your home, then it might work for you. That, however, is not the situation most people are faced with.
You’ve worked too hard to pay off your mortgage just to put yourself back in the hands of a lender. There is no such thing as a get-rich-quick scheme, and if someone is telling you there is, I would say to run the other way. I believe the best method of succeeding in saving and investing is by doing it consistently, in well-diversified, tax-advantaged retirement accounts, with cashflow from your household income.
It certainly isn’t sexy but getting rich slowly will give you the best chance at fulfilling your dreams, and save you from a potential nightmare.
About the author: Russ Gaiser III, MBA
Russ Gaiser III, is a financial advisor at The Financial Guys in Buffalo, NY, where he focuses his practice on wealth building and retirement planning. He is also a Dave Ramsey Master Financial Coach, helping clients to improve their budgets, maximize cash flow, eliminate debt, and build wealth for the future.
Advisory Services offered through Blackridge Asset Management, LLC, a Registered Investment Adviser. Securities are offered through Peak Brokerage Services, LLC, Member FINRA/SIPC. Blackridge Asset Management, LLC is a separate and independent entity from Peak Brokerage Services, LLC.
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