Using Loans to Invest

By Mike Hughes

Borrowing money to invest can be a great idea and can help anyone dramatically boost their investment returns; however it is very risky and should be a strategy used by an experienced investor who has the capital to repay the loan should things not work out. If the investment doesn’t work out, the borrower must not only come up with money to cover the loss, but also for the interest payment on the loan plus transaction and brokerage fees. Using loans as leverage can significantly increase investment returns and generate riches, however large gains can also mean large loses, and this strategy is not recommended for amateur investors.

Two options of types of loans that one can use to invest are FHA loans and home equity loans. First, the FHA loan is a federal assistance mortgage loan issued by the Federal Housing Administration. Apart from being able to use it to invest in your home, there are many advantages to using a FHA loan. First, it is easy to qualify for a FHA loan as opposed to more traditional types of loans. Lenders have less to lose because if you default on the FHA loan, then they can foreclose and get their money back. The FHA loan also has very relaxed requirements and low interest rates, which translates to no or low down payments.

Second, using home equity loans to invest can be advantageous, but should be done carefully. A home equity loan allows you to borrow up to 125% of the appraised value of your home, less any existing mortgages. Home equity loans have become increasingly popular because of their low interest rates and the interest deduction. Using a home equity loan to invest in securities is generally a bad idea, except if you are financially stable, are not reliant on investment returns to cover your mortgage payments and are a knowledgeable investor. Make sure that the return on your investment is a couple points higher than the interest rate on your home equity loan. Overall, using loans (like the FHA or home equity loan) can be very beneficial to help improve investment returns; but this strategy can be very risky and should only be done by experienced investors with enough capital to cover the loan.

Sources:

http://www.realestateweblog.org/how-to-use-fha-loans-to-invest-in-your-current-home.php

http://www.lendingtree.com/home-equity-loans/advice/using-home-equity/using-home-equity-to-invest/

http://www.gatherlittlebylittle.com/2008/02/should-i-get-a-loan-to-invest/