Ever see advice suggesting you borrow against your home to invest? On paper, it might look like a smart arbitrage play. But this video breaks down why things don’t always go as planned. Learn the risks before leveraging your equity.

Topics Discussed:

• Borrowing home equity to invest
• What happens if home values drop
• What if the market goes down
• Why the math looks better on paper

Transcript:

Oftentimes, my clients send me questions about financial advice they see online and say, “What do you think? ” One thing that I’ve been hearing a lot of lately is the idea of borrowing against your home equity to invest in the market. The way this usually goes is that let’s say you have a million-dollar home and you have $300,000 of equity, your mortgage is 700,000. You can take 100,000 of that equity, borrow at say 6% on a HELOC, and then go turn around and invest that money in the market and hopefully earn 8 or 9%. So you’re leveraging the money in your home, the growth that you’ve had in your home, and that equity you’ve built to go invest in the market. Now on paper, this sounds like a great idea, but unfortunately, oftentimes things that look great on paper might not pan out as well in real life.

So there’s two things you need to think about when thinking about pulling out equity from your home to invest in the market. The first is the value of your home. If you live in an area where home prices fluctuate, there’s a chance that the market value of your home, your million-dollar home, could be worth $900,000. In that scenario, you’ve lost 10% of the value of your home or the equivalent of the $100,000 that you’ve borrowed to go invest in the market. The second example is when the market doesn’t go up. So we know that historically the market goes up over time, 8 or 9% in US equities. However, if the market goes down or has two or three down years in a row, which can happen, now you’re losing money on that investment. And do you have the ability to handle that risk or that loss in the short term?

So when you see something like this, fundamentally, yes, it makes sense borrowing and earning more than you’re getting charged for on the loan, but in reality, this can often not work out. So just be aware that, in practice, oftentimes these risks can outweigh the benefits of doing such a trade.

Lake Road Advisors (LRA) is a virtual wealth management firm headquartered in Corning, NY, with offices in Ithaca, NY, and Vancouver, WA. Founded by Paul Sydlansky, CFP®, in 2016, it serves successful couples planning their next chapter—whether that’s retirement, part-time work, or a less demanding second act. Paul has worked in the financial services industry for 25+ years. Prior to founding Lake Road Advisors, he worked at Morgan Stanley in Manhattan for 13 years, where he was a senior-level manager within the Institutional Equities Department. In 2018, he was named to Investopedia’s Top 100 Financial Advisors list. Paul received a Bachelor’s degree in Economics from Marist College and holds an MBA from New York University Leonard N. Stern School of Business. Paul is a CERTIFIED FINANCIAL PLANNER® and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network. They can be reached by phone at the Corning, NY office at (607) 438-2914, Ithaca, NY office at (607) 463-8400, or Vancouver, WA office at (607) 292-2172 or at the firm’s website at https://www.lakeroadadvisors.com/