Today's economic conditions have prompted many people to jump into the stock market in an unusual way: through their homes. Here's how it happens: Interest rates are very low right now, enticing people to refinance their mortgages. Refinancing is often a good thing to do because it can lower your mortgage payments.
But with the housing market having appreciated strongly in many locations, many people find that their homes have jumped in value, leaving them with higher equity stakes. Some of these folks are choosing to take advantage of this by refinancing or taking out home equity loans, in order to generate money with which to invest in stocks.
This may sound harmless. It may even sound smart and effective. In truth, it could work out well for you. But it's not without some serious dangers. The strategy presumably leads many to count on making enough money from their investments to cover their mortgage payments.
This isn't a sound plan, though. For starters, mortgage (and other loan) payments are generally due each month, rain or shine. The stock market, meanwhile, does tend to go up over time, but that's over the long haul. Over a shorter period, of up to several years, it could stagnate or even plunge. At the very least, it will be volatile. The money you take out of your home to invest might disappear entirely, leaving you with larger monthly payments and less equity in your home.
It's certainly tempting, the idea of building a portfolio full of stocks in firms such as Coca-Cola
The practice of investing with your home's equity is so worrisome that the National Association of Securities Dealers (NASD) has issued an investor alert, making the following points:
- Unlike investing with savings, when you invest with mortgage money, you stand to lose more than your principal if the investment goes sour. You can lose the collateral supporting the loan -- namely your house.
- You may put your money in higher risk investments than you might normally select, in an effort not only to match the rate of your home loan but in the hopes of surpassing this rate. Furthermore, with so much at stake, if a given investment does poorly, you may feel compelled to move your investment into even more risky investments to make up the difference, further jeopardizing your home, credit standing, and overall financial health.
The NASD goes on to offer advice on how to deal with brokers who may recommend this strategy. (By the way, if you're looking for a new or better brokerage, or guidance on choosing one, check out our Broker Center.)
For much more information on homes and mortgages, drop by our Home Center.
Longtime Fool contributor Selena Maranjian owns share of Microsoft.