Quote:
Originally Posted by SailinAway
Thank you to everyone who has offered information and advice here. I've read it all and will read it again and use it for further research. I appreciate the time that people put into their replies to my question.
So far no one has mentioned using home equity for investing. Any thoughts on that and how to do it?
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The problem with using Home Equity (HE), or any other form of BORROWING to finance investing, is that the interest payments for the loan diminishes your overall return.
For example, if you a getting a 5% return on your investment but paying 3% on a HE loan, your actual overall return is only 2%, barely keeping ahead of inflation. You have the option of accepting a lower rate of return overall or seeking better earning on your investments. However, seeking a better rate of return on investments comes with higher risk.
Plus, loans, even HE loans, require repayment of principal as well BUT your principle is tied up in your investments. As you shrink your HE loan principal, your investments will have to shrink as well.
Further, how are you going to pay your HE payments? Are you planning to take it out of your investment earnings? Suppose the market tanks and your earnings for the year are $0. Can you afford the extra HE bill out of pocket until the earnings recover?
On top of that, suppose your investment collapses and becomes worthless. This is unlikely but CAN happen. Now your house is tied up in your investment debacle. You still have to pay off the HE loan with no assistance from your investment.
Having your home disencumbered and free from risk is one of the benefits of old age and retirement. All investment carries some risk and you don't want that to transfer to your home, IMO.
There is adage: "Only Invest What You Can Afford to Lose". If you are putting at risk money (or assets like your home) that you NEED for day to day living, you are probably making a mistake.