Should You Use a Home Equity Loan to Buy Stocks?

As with much advice at LendingTree, determining the best loan product for a consumer varies dramatically from case to case based upon the borrower's financial health and outlook. Concerning the question of borrowing against home equity to leverage "promising" stocks, the answer is a hearty "no way" for most people. At the bottom line is the metaphor that a home equity borrower is using someone else's money to back a roll of the dice. If they lose, they not only lose the money (that they still owe), they've literally bet the farm.

Pro: Wisdom of Using a Home Equity Loan to Buy Stocks

Writing for Yahoo, Benzinga's Jonathan Yates told readers that homeowners can diversify their portfolios by borrowing against equity to invest in the market. Because of the wide range of home equity loan products available today, the argument goes, a consumer will find an advantageous source of money for long-term investments that protect their portfolios. Anya Martin of The Wall Street Journal (WSJ) claims that planned longevity – staying with the home for at least five more years – can provide a sufficient buffer to recover stock investments that dive in a volatile market. In short, it's risky at best.

Con: Be Very Afraid of Borrowing to Hop on a Tip

Herb Greenberg, writing for The Street, calls the notion of using home equity to buy stocks the "scariest thing" he's heard of in a long time. He says, If you have to get a loan to buy shares that you believe will yield a greater than the rate on your mortgage – you have no business buying stocks. You're out of your league." He reminds consumers that home equity loans are ultimately designed to pay for improving the home – ultimately to increase value. And even then, there are inherent risks with home values in flux.

Cullen Roche, Founder of the Orcam Financial Group, argues against Benzinga's Yates, "Leveraged diversification can substantially increase the risks within your portfolio." He recommends leaving the risk to individuals who can afford to lose the lot and keep on thriving financially.

Other Risks in Leveraging

In her WSJ article, Martin notes that there's a double-whammy potentially facing taxpayers who use home equity to finance other investments. No matter how the stocks perform, the homeowner can deduct interest paid on the home equity loan (talk to your financial advisor). However, if the stocks do well, the borrower will have to pay capital gains taxes on the profits.

The practice has become so risky, in fact, that the National Association of Securities Dealers has begun to take enforcement actions against brokerage firms that recommend home equity loans as a source of capital to buy stocks.

Here are some questions to consider before using a home equity loan to play the market:

1. Can I afford both the mortgage and the home equity payments each month even if the re-invested money plummets down a market slide?

2. What other ways can I raise investment money without securing it with my home?

3. Are there other investment opportunities with potentially lower returns but greater protection from volatility?

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