In the past it may be been more advisable to use equity in your home as money to invest, but with current economic conditions this may not be recommended.
A home equity loan is a loan of a percentage of the difference between the appraised value of your home and the amount you currently owe on your home. Some reasons people take out home equity loans are for medical bills, college expenses and home remodeling. When used for instances such as college expenses and home remodeling you may see an increase in either income or value of your home. It is advised not to use home equity for high cost items that lose value quickly such as automobiles, vacations and other items.
In the past many people may had considerable equity in their homes. With the substantial increases in real estate values and the following market downturn, many people became “underwater” in their homes. They may have been used to being able to draw from their home equity for emergency expenses, and now they are making payments on a home where they owe more than it is worth.
Don’t lose your home
One risk you take by investing with money from the equity in your home is to lose your home. If the value of the stocks you purchase considerable value and you do not have other resources to make payments on the home equity loan you could lose your home to foreclosure.
Is the risk worth it
Even though the rate of return could be considerably higher than the cost of interest payments on home equity loan, you need to weigh the consequences. If something happens and you do not have the money to make payments on the home equity loan, you could lose your home.
It is also recommended to have an emergency fund available for unexpected expenses that may come up. Some people consider a home equity account as an emergency fund, but if you need to use your emergency fund you may not have the funds to make the payments on the home equity loan.
In most cases, it is advised not to invest unless you can afford to possibly lose the money. It may sound like a solid deal, but the bottom can fall out of some deals very quickly.
Even if the chance to invest promises great results, consider another way of funding it besides a home equity loan.