Borrowing to invest is a strategy that many investment professionals often tout. But, is it a really good idea? And should you put your home on the line so that you can invest, and maybe get tenfold the money back?
When talking about borrowing to invest, you first need to look at what you’re borrowing against and what the investment is that you want to make. Taking out a HELOC on your home in order to invest might be a good idea, but only if the amount you’re investing is very small. So if you wanted to buy $1,000 worth of stock in one company, it might be a good idea because the amount is very small and you’ll likely be able to pay it back very quickly. In addition to that, there’s also a very good chance that you’ll make your money back quickly, also allowing you to pay it back very quickly. And, you’ll only be paying the interest on what you withdrew until you do pay it all back, or until the HELOC payment date comes due. This latter scenario most likely won’t come up, but only if you take out a small amount and plan to be investing only for a short period of time.
While the above scenarios are times when it might make sense to borrow so that you can invest, there are more times than not when borrowing to invest simply doesn’t make as much sense. Taking out a home equity loan and spending it all, or mostly, on investments doesn’t make any sense for a number of reasons. One of those reasons is because unlike a HELOC, you’ll have a huge amount of money that you’ll be spending on a risky investment; that is, one that you don’t know if you’ll get a good return on or not. If you don’t get a good return on the investment, you’ll still have that large loan to pay back, and perhaps no money to do it with. Should that be the case, your home will be on the line and you could end up losing it – all to a bad investment.
With any investment, and no matter what kind of borrowing you intend to do in order to make that investment happen, you must always also consider the fees that you will be charged for it. Investing is not free, and you most likely will have adviser fees, mutual fund fees, brokerage fees, and any number of other fees that are all attached to this kind of investing. This is yet another reason why borrowing to invest is not always a good idea.
So when does it make sense to borrow to invest?
One of the only real times is if you’re going to be using a HELOC or home equity loan to buy a second property. In this instance, you could use the money from the loan you borrowed to help pay for the mortgage or the down payment on the other property. There are few fees that will be involved, and real estate is always the best investment you could make. And, if you happen to be buying that second property as an investment property, you will also have a good return on that investment (in the form of rent) and will know with certainty that you’re going to have the money in order to pay it back.
Before borrowing to invest, always speak to a professional about what you’re going to borrow, and what you’re going to invest in. There are many cases where it makes all the sense in the world, but it’s definitely something you don’t want to lose your home over. ”
