Mortgage Cash Out Refinancing and Investing Problems
- One of the problems with using the equity in your home for investment purposes is that you are borrowing money to invest. If you pick the wrong investments and end up losing your money, you will have to pay back the loan even though you lost all of the money through investing. If you planned on making enough money, through investments, to cover the loan payments, this could devastate you financially. At that point, you would have a large amount of debt as well as a large loan payment.
- Another problem with using home equity money to invest is that you could potentially lose your home in the deal. When you take cash out of your equity by refinancing your existing mortgage, you are basically tying your investment money to your home. If the investment does not work out and you are unable to continue making your mortgage payment, the lender may foreclose on your property. You have to be very secure about your investment because you are risking your home over it.
- When you have a mortgage on your home, you have to pay a specific rate of interest to your mortgage lender. This is a known cost on your part; and if you have a fixed rate loan, it does not change. If you take out a new loan to pay off your existing mortgage and take cash out for investment purposes, the returns on those investments are uncertain. For example, if you expected to borrow the money at 5 percent and make a return on investment of 7 percent, your plan would not work out if the investment only returned 3 percent.
- Even though you could possibly borrow money from your home's equity to invest, this may not necessarily be the best way to acquire that money. Instead of risking your home, you could instead get a margin account with your broker. This allows you to essentially borrow money from your broker to invest in the market. You could also take out a personal loan without having to secure it with your home.
