Should I borrow against equity to invest?

Posted by  on Dec 17, 2014

Q: I've paid down about $100,000 on a $300,000 mortgage. When I refinance, I'm thinking of doing a cash-out refinancing for as much as I can get, so I can use the money to invest. Between low mortgage rates and the tax break on the interest, I figure this is a cheap way of getting investment capital. Do you see any downside?

A: Certainly, tax-adjusted mortgage rates represent a low-cost source of funds; but given the low interest rate environment, you have to ask yourself whether you could invest the money productively enough to justify the added risk you are taking on. Consider the following in particular:

  1. While today's mortgage rates are around 4 percent, rates on deposit products are down below 1 percent. Treasury bond rates range between 0 and 3 percent. So, even allowing for the tax benefit, you would be hard pressed to earn more than the mortgage interest you are paying unless you were willing to take more risk.
  2. The problem with venturing into riskier investments is that you would already be increasing your risk level by borrowing to invest. That effectively leverages you so that market fluctuations would have a disproportionately large impact on your net worth.
  3. You should only consider this kind of approach if you have a high degree of certainty about your income, because you would be putting your house on the line. Rather than decreasing your monthly payments by refinancing, you would almost certainly be increasing them by borrowing so much additional principal. If anything jeopardized your income, those higher payments might become impossible to meet, putting you in danger of foreclosure.

As an alternative, you could take the money you save by refinancing your remaining mortgage balance and start regularly channeling that into an investment account. It might take a little longer to accumulate than borrowing against equity, but it would be money you could invest without leverage and without putting your home at risk.

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