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
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