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Is it a good idea to borrow from HELOC?

Posted on: 14th Nov, 2006 08:49 pm
I had cashed in my investments to pay 25% down payment to buy a new home. Now I am thinking of taking out a home equity line of credit, borrowing against it and then investing the loan proceeds. I think this is a good idea to rebuild my investments. What do you suggest? Jessi
Hi Jessi,

Welcome to MortgageFit Forums.

It sounds to be a good idea, taking a home equity line of credit (HELOC) and then investing the loan proceeds. But practically I think it is very easy to say than done. You are getting into a risky territory by investing borrowed money.

Its important that you invest in something that has higher rate of return than the interest rate that you are paying. Many people may think that sounds like a sure thing in today’s market. But there are several things that can go wrong:

Interest rate on your loan can rise:
Rates on HELOC are generally not fixed. They are dependent on prime rate, so if the prime rate goes up so will the interest rate on your loan. This means that you will have to earn more on your investments to cover the higher interest cost.

Investments can mover lower:
The investments that you choose don't perform well. May be that you invest in a sector that is expected to give a high rate of return, but then begins to sink.

Think about all these points and then decide whether it will be a good idea about investing borrowed money.

Thanks,
Jerry
Posted on: 14th Nov, 2006 09:14 pm
You can invest in 401k or any other retirement plan account like the IRA. A home equity line of credit may be too expensive given the fact that it offers a vraible rate.
Posted on: 15th Nov, 2006 03:01 am
Hi Jessi,

I too feel that using up your line of credit for investing is not a good option. This is because you will have to earn more on investments so that you gain a considerable amount with which you can pay the high interest. And, it's quite natural that you may not get a higher rate of return on your investment.

In order to avoid risks, it is better that you start investing in your 401K plan account. You can also start building an emergency fund equal to around three to four months' expenses and then you can keep this cash in a money-market fund.

Thanks,

Caron.
Posted on: 15th Nov, 2006 03:40 am
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