How to Invest Home Equity in Stocks

Investing in the stock market can be very rewarding, but there is always risk involved. That risk can be magnified when you use your home equity to invest. However, investing home equity can also be a savvy financial move that pays off in the long term.

Instructions

1. Get home equity either through a cash-out refinance of the primary mortgage, or through a home equity loan. In both cases, you will need to find a lender and get an appraisal to find out how much your home is worth and how much money you'll be allowed to borrow. Which option is best for you depends on your credit rating and the loan terms available to you. Cash-out refinances are often preferable because they have lower interest rates, but you typically have to extend your mortgage to a full 30-year loan, which may not suit you if you're close to having the original mortgage paid off. With a home equity loan, you keep your original mortgage but you have to pay the new loan at the same time, which can create cash flow problems if you don't have enough monthly income to handle two loans at once.

2. Park the money in a high-yield savings account while you decide what to do with it. The whole point of using home equity to invest is that you are borrowing money at a (relatively) low interest rate and hoping to invest it in something that has much higher returns, so you must choose your investments wisely. Take your time and create a comprehensive asset allocation plan that includes your remaining home equity, retirement accounts, bonds, real estate investments, stock portfolio and cash accounts. Remember that all investments have some risk.

3. Start investing. If you have chosen to invest in the stock market, open a taxable brokerage or mutual fund account and buy whatever stocks, bonds or mutual funds you require to complete your desired asset allocation. Remember that these investments can be extremely volatile in the short term, so you should not invest any money that you need right away. Home equity should be invested for the long term.

4. Start researching in your area if you are planning to use the money to purchase rental properties or other real estate investments. Make sure you're buying properties that you anticipate will return more than you're paying in interest on your loan. Real estate investments are usually somewhat more stable than the stock market, but that's not always true, so research carefully.

5. Leaving home equity money in CDs or savings accounts is probably not in your best financial interests. Although these investments are extremely low risk, they generally pay a lower interest rate than what you'll be paying for a mortgage or home equity loan, so there's no way to make money with them.