My financial advisor wants me to get a $100,000 home equity loan and he will invest it. Good idea?

Question

I would use part of the interest earned to pay the loan. I have $500,000 equity. My mortgage balance is $350,000.

Answer 1

never borrow to invest money, its stupid because it will take years longer to pay off your house and you are putting steady and safe money (home equity) into risky investments, if you have a half million in equity you are halfway to retirement, don't blow that over some silly risk to try to make a few extra bucks.

Fire your broker and get someone who actually understands money.

Answer 2

that is some of the worst financial advice I have ever heard. UNless its a sure thing, which i doubt cause there is no such thing as a sure thing. If your rate on the home equity is say 8% then you need at least an 8% return on you invest just to break even, IF you get like a 12% return then your only making 4% return which is about the same as investing in a long term cd, question is it the return on investment worth the risk, in most cases if your paying interest and having to get a loan to invest its not worth it because the interest cost is too high and thus your rate of return has to be too high to cover the cost. The risk reward is just not worth it. I dont know of any investment that is gauranteed to return that high of a return. I guess if you really like the stock or investment and think it can beat the interest cost and its risk reward is worth it then go ahead and do it. But dont do it just cause your dumb financial advisor told you to do it, thats just bad advice and you may want to report him to the SEC, cause advisors should not be advising like that.

Answer 3

Does that mean the house is worth 850k? or it's worth 500k if you sold it and would only clear $150k max before sales commission/closing costs. If the second scenario is correct, it sounds like you would drop below the 80% equity ratio and would have to get Mortgage insurance

He'll probably take a good chunk of that 100k for his commission. There's no guarantees he'll make money - he could lose it all with the wrong investment choices. You'd be better off doing nothing or investing that loan in more real estate.

Answer 4

Sometimes it can be a good idea to borrow to invest. If you can borrow at 7%, say, and you can be confident of making 11% on your investments, then it might be good. There are investment strategies that can expect a 10-12% return, but there is a risk.

But the main thing is you have to trust this guy and what he is going to do with your money. You have to really trust him.

That said, you must be really sure that this guy knows his stuff and has a great track record to proove it. Don't go by what he says. Check out everything he says first. He should give you a resume/CV/Qualifications and some references. Contact his references and ask them for references, etc. Contact his company and former companies. Check with the Better Business Bureau, your state's Attorney General and the SEC to see if there are complaints against him.

If he comes off as the next Warren Buffet, THEN think about it. If he doesn't, look for someone else.

Answer 5

I'd hesitate to do it, bud. It IS possible to leverage your investment with borrowed fujnds, depending if you have (a) a low, fixed-interest rate home equity loan (which is becoming harder to find), (b) a relatively medium-length time horizon of 5-15 years to invest (it would be a killer if the market went south for 2 or 3 years regardless of how good your advisor is, so you want time to have a chance to recover, and (c) he's damn good at investing.

Look at it this way. Let's say you DO lend him $100,000 and you borrow it at 6.5%, for example. You get an additional tax break on the home interest, which probably cuts your effective rate of borrowing to about 6% or so (depending on your tax bracket). Then, let's say, your killer advisor friend says you can make an average 10% annualized on your money in an aggressive portfolio (remember he's SAYING this...) In that best-case scenario, you are basically netting a profit (after paying the interest on the loan after taxes) of 4% or $4,000 on your $100,000 investment. THEN you'll have to pay taxes on some of the ivnestment earnings (unless he puts you in some annuity product, which I suspect he will so he can make bigger commissions from the insurance company selling it to you...) That cuts your net return even more.

Do you REALLY want that much risk for that little overall reward?

Answer 6

Nope. Generally a really bad idea, and you probably should fire him.

The ONLY possible exception would be if you have a VERY low interest rate on your home equity loan AND you can invest the money in RISK-FREE securities with a higher yield. The only truly risk free securities are U.S. government bonds. But it is highly unlikely you can invest risk free and borrow at a lower rate.

So I'd get a new advisor. Seriously.

Answer 7

In and of itself, investing borrowed money is not wrong or dumb- it's called leverage. Professional traders and investors leverage themselves all of the time by using margin or by trading futures which are inherently leveraged instruments. That being said though, here are a couple of things you should know. First, even the pros don't use leverage to the point that losses could endager their livelihood. i.e. they trade with money they can afford to lose abig chunk of without threatnening their sustenance. Second, 90% of traders and investors lose money in the long-run. i.e. only 1 in 10 actually make money, and much less than that can make a meaningful return at that. If your financial advisor was in the elite few percent that can make a good consistent return on money, he wouldnt be your financial advisor. He would be out there somewhere creating a hedge fund and managing millions.

So either way you look at it, baaaaaaaaaaaaaaad idea.... 1) You can't afford to lose the borrowed money, so leverage is wrong in this situation and 2) There's an extremely small chance that you advisor is actually good enough to make you a return that would make it worth the risk even if you could afford to lose the money, because if he could, he wouldnt be working as a small time financial advisor in the first place. Take advice from a professional trader: Fire him. he's either dishonest or dangerously delusional.

Answer 8

It all depends on how the money is invested. Putting the money in stocks and leaving it there is too risky.

To get an idea of what might happen you need to learn more about the stock market business. People such as myself trade stocks.

I also sell stocks I don't own...wait until the price falls and then pick them up cheaper.

Not so go for the person that holds stocks!!

Check this membership site out and you'll discover that the only way to do this is to trade...not hold.

Answer 9

What would the loan rate be and is it a fixed rate? What would be the return on the investment? Is it a guaranteed rate? If the return is substantially larger, then it might be worth your while. If the loan is not fixed and the investment isn't fixed I would definitely say no. Also, what is your relationship with your adviser? How have their other recommendations panned out? With all of these questions plus others that I didn't write, my gut feeling says no, don't do it.

Answer 10

I agree with previous advice...Fire him.

Investment 101:

1. Investment is risky, that is why you get a higher rate of return.
2. Any spare cash, pay off debt first. (Mortgage is debt)
3. Keep enough cash for immediate expenses.
4. Only invest what you do not need.

Answer 11

It's not a bad idea if the return on the investment will be higher than the interest paid on the loan.

Will the investment be guaranteed?
Probably not a good idea to invest you equity in the stock market though.

Do your own research, don't be pressured, it is your house on the line after all!