Q&A: Investing Home Equity: Is It Free Money?

Like the saying goes, there is no such thing as a 'free lunch.'

Question: My advisor just suggested that I take half the equity out of my house — I have no mortgage — and put it in the stock market for about four or five years to earn a much higher return with free money. Good idea or not?

Ric: First of all, it’s not free. If you borrow against the equity in your home, you’ll owe interest on the loan. The cost of that loan reduces the profit from your investment strategy.

Second, there’s no assurance you’ll earn a profit with your investments. If your advisor had you do in 2007 what he’s suggesting now, you’d have been very unhappy in 2008 after the stock market fell 35%.

This is why federal regulators don’t like your advisor’s sales pitch. If your investments fall or you become unable to pay the loan, you could lose your home.

Sure, removing equity from the house can make sense — but to create liquidity, not merely for investing in the stock market, hoping to make a quick buck.

I fear your “advisor” is really nothing more than a commission-based salesperson in disguise, who is thinking about all the money he’ll earn getting you that mortgage and then investing the proceeds into investments he’ll sell you. I’m glad you asked for a second opinion before proceeding.

 

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