Getty Images
Your home is a big investment, and for many homeowners, it's their biggest investment. However, if you're trying to meet the money goals you've set to solidify your financial future, you might be trying to free up cash to make other types of investments.
And while it makes sense to try to find room in your budget to put more toward investing, you may have other options. For example, yours home heritage it may be worth taking advantage of it to invest through a home loan or Home Equity Line of Credit (HELOC). These equity leverage options allow you to borrow against the value of your homeusually with competitive interest rates compared to unsecured loans.
But is it a good idea to use your home equity money to invest? Here's what the experts have to say.
Find out how much your home rate could be now.
Should you use your home equity to make an investment? The experts intervene
There are times when it makes sense to consider using your home equity to make an investment and sometimes it doesn't, experts say. Here's what to consider when making your decision:
The interests
Although home equity loans and HELOCs often offer competitive interest rates, it is important consider the cost of the interest you will pay and how it relates to your expected return before using one or the other to invest.
“It depends on the rate you can get for a home equity loan,” says Alex Blackwood, co-founder and CEO of Mogul Club, a real estate investment app. “You have to approach it as a relative cost of capital. For example, if you can get an 8% interest rate and make an investment that makes a 10% return, you should definitely make that investment because you're earning a incremental increase 2%”.
However, if your interest rate on the home equity loan or HELOC is higher than your rate of return, the investment may not be worth the full cost of the loan.
Access more investment capital using your home's value today.
Tax implications
If your investment is profitable, you may have to pay capital gains taxes about your benefits. As such, be sure to consider the potential cost of any tax implications that may arise when determining whether to tap into your home equity for investment purposes.
“If you're confident that your after-tax returns will exceed the cost of capital, it could be considered,” says Matt Willer, managing director of capital markets at Phoenix Capital Markets, an investment management firm.
Other financing options
Although many experts say that certain situations justify it using the value of your home to invest, some say you should avoid doing it as it can be too risky.
“I can't think of a situation where using the value of the home to make an investment is a good idea or in the best long-term interest,” says Rob Burnette, investment advisor representative for the planning firm financial center, Outlook Financial Center.
“I generally don't recommend using home equity to make an investment,” says William “Billy” Hatton, CFP, owner of Billfold Budget Counseling. “While you can diversify your real estate exposure, you're still taking on debt for an investment, which is a risky proposition.”
In turn, you may want to consider weighing any other financing options you may have.
Discuss your home equity loan options with a professional today.
The bottom line
Whether or not it makes sense to use your home equity to fund your investments depends on a number of factors. As you decide whether it's the best path for you, be sure to weigh the cost of borrowing and the tax implications of the investment against your potential returns as you make this decision. And in some cases, you may want to avoid this route altogether and consider your other financing options first taking advantage of their heritage.
