Stocks for Home is Risky Trade

The rise in home values is nothing but good news for homeowners. What could be better than seeing your largest investment grow? The problem is, while all that home equity offers a tempting source of loan collateral, it doesn't keep you from taking out too much cash or spending it unwisely. Before you borrow up to 125 percent of your home's value for a hot stock market investment, consider the ultimate risk: losing your home.

Our rosy economic picture doesn't seem to invite gloom and doom scenarios. Why worry? Yet even in our current economy, some homeowners face the nightmare of foreclosure, about 1 percent of homeowners in 1998, for example. Many more are simply overextended. How did they get there? Or more importantly, how can you keep your debt under control in the first place?

The wealth is certainly available, and that's why home equity lenders love to dangle tempting loan offers in front of you at every opportunity. The median value of a single-family home rose about 50 percent over the last ten years, according to the National Association of Realtors. With your home's cash value so high, why resist the temptation of using it? There's certainly nothing wrong with the idea. Taking out a home equity loan or second mortgage can offer several sensible scenarios. But each one has a downside.

Perhaps your high interest credit cards and other consumer debts are pinching you. This is a very common pitch from lenders, i.e., "Cash for Debt Consolidation." Within reason, you can fold those debts into a second mortgage loan with a lower interest rate and lower monthly payments, and even deduct the interest on any loan amount up to 100 percent of your home's value. The downside is, even if you cut the old credit cards up, if your spending habits aren't under control you'll find yourself taking the next credit card offer in the mail and racking up even more debt. It's a vicious cycle.

The riskier scenario involves leveraging stock purchases with home debt, or vice versa--leveraging home loans with stocks as collateral. Some brokerage firms will let you borrow a mortgage loan using the stocks in your loan portfolio in place of a down payment. But before you trade in your success in the market for a new home, look at the downside. These home leveraging deals typically require the stocks in your account to equal at least 40 percent of your loan value. Not a problem in today's booming market, right? But what if your portfolio falls on hard times? The ouch factor of a margin call could take on more pain if you have to sell your home. A traditional loan with a cash down payment might be a safer bet.

Sources used to create this article include writer Terry Savage and the Chicago Sun-Times.