In most cases, home equity loans have no restrictions on how you can use the money. However, some uses for home equity loans may be more ideal for your situation than others. One way you can use the funds is to invest in stocks. But before you do, consider the pros and cons of relying on your home as collateral.
How Can You Use Home Equity Loan Funds?
Lenders generally allow home equity loan funds to be used for any purpose. Because of their low interest rates, home equity loans are popular ways to consolidate high-interest debt such as credit cards and personal loans. A home equity loan also is a common way to fund home improvements. In fact, if you use your home equity loan funds to buy, build, or substantially improve your home, you can deduct the interest on the loan. People also use their home equity loan funds to make large purchases. Some popular examples include funding a child’s college education, putting a down payment on a new home, paying for unplanned expenses, or paying for a wedding or vacation.
Pros and Cons of Using Home Equity Loans To Buy Stocks
Pros Explained
Potential for profit: When you invest money, your goal is to earn a return. When you use a home equity loan, you’ll need to earn more than the interest rate on the loan to earn a profit. There are no guarantees you will earn money through stocks. However, they do have the potential to earn significantly more than the average interest rates on home equity loans. Access to a large sum of money: A home equity loan allows you to borrow a significant portion of your home’s value, so depending on your current equity, you could borrow a large sum of money. Lower interest rates: Because home equity loans are secured by your home, they generally have lower interest rates than unsecured loans such as credit cards. Fixed interest rates: Home equity loans usually have fixed interest rates, meaning you’ll have a predictable monthly payment, which can help you budget.
Cons Explained
Risking your home: Home equity loans are secured by your home, so if you fail to make your payments, you could face foreclosure and lose your home. Stock market volatility: The stock market is inherently volatile, meaning the stocks you buy with your loan proceeds could decrease in value. Interest expense: Home equity loans may offer low rates, but you will still have to pay interest on the funds you borrow, which can add up over time. Changing home values change: If the housing market experiences volatility, your home could lose value and you could find yourself underwater on your loan.
Should You Invest in Stocks With a Home Equity Loan?
One of the main benefits of home equity loans is that you can use the money for any purpose, including investing in stocks. However, just because you can use your home equity loan to buy stocks doesn’t necessarily mean you should. You may be tempted to use a home equity loan to buy stocks when there’s a bull market and you believe you’ll make money quickly. But the stock market is unpredictable. During a bull market, stocks could correct, and you could lose some of your loan proceeds. If you’re relying on the stock investments to repay your loan, you could be forced to sell at a loss.
Alternative Ways of Investing in Stocks
If you don’t want to use your home equity to buy stocks, you can fund your stock purchases in other ways.
Invest in Tax-Advantaged Accounts
Tax-advantage retirement accounts such as 401(k) plans and individual retirement accounts (IRA) are common ways for investors to buy stocks. With traditional retirement plans, your contributions can be made with pretax earnings. With Roth 401(k) or Roth IRA plans, you contribute after-tax income, but you can withdraw the funds and any earnings tax-free in your retirement years.
Get on a Budget
Getting on a budget can help you save money to invest with your current income. You might find a few areas in your budget to cut back on, such as eating out less. You then can redirect those funds to your investment account each month.
Use Dollar-Cost Averaging
Dollar-cost averaging is the practice of investing the same amount of money at set intervals over time. For example, rather than investing one large lump sum and timing the market, you would invest a certain amount of money each month regardless of the ups and downs in the market.
Tap your Excess Savings
Emergency fund savings are intended to provide financial stability during unexpected events, and these funds should be liquid, or easily accessible. If you have savings above and beyond your emergency fund, you can use it to buy stocks that align with your financial goals.
Take Advantage of Round-Up Apps
Apps such as Acorns allow you to round up your purchases to invest your excess funds. For example, if you make a purchase for $3.60, the app rounds your total up to $4 and puts the excess $0.40 into your investment account. Round-up apps are great options for people who have trouble finding room in their budgets for investing.
Pick Up a Side Hustle
If you don’t have extra room in your budget for investing, consider picking up a side hustle to increase your income. You can continue paying bills with and living off your regular income, then use your side-hustle income for your investment account. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
