Think it’s Time to Tap Your HELOC for an Investment? Get Some Advice First
Any bank or mortgage broker who wants to loan you money for a home equity line knows it’s in their
best interest to lend right up to your credit limit. They make more money that way. Yet just because you
qualify for a home equity line doesn’t mean you need to use it, particularly as a bank for investment
Quite a few things need to go your way for you to use your home equity line effectively. There’s plenty of
risk in plowing loan money into investments that may suddenly lose their value if they mirror the Dow’s
drop over recent weeks. While home equity loan interest rates may cost you less than borrowing from
your investment brokerage firm by purchasing investments in a margin account, you still need to be very
To borrow home equity effectively, you need stable interest rates and rising home values that go with a
strong economy. Remember that mortgage professionals are not investment professionals or financial
planners – that’s why they’ll always encourage you to borrow if you have the flexibility to do so. For
balanced advice, you should consult a financial planner professional.
In all honesty, most planners would tell you that if you need to borrow from home equity, you may not be
in the strongest financial position to make an investment in the first place.
It makes sense to go over a few home equity borrowing basics. There are two primary kinds of home
equity debt. A home equity loan is a one-time, lump sum that is paid off over a particular amount of time
with a fixed rate and number of payments. A home equity line of credit (also known as a HELOC), works
more like a credit card because it has a revolving balance – interest is due on the outstanding balance and
that rate may vary over time.
Here are the things you should discuss with a trusted financial adviser before you tap home equity to put
in real estate, securities or any other form of investment.
• Will your investment deliver a greater after-tax return