When investing your money in any security, it is usually risky business. Making the wrong decision can cause you to lose your investment very quickly. According to the National Association of Securities Dealers (NASD), consumers who use the equity in their home to invest in securities are taking a big risk.
Some consumers have taken out new mortgages, refinanced their mortgages, or obtained lines-of-credit secured by their homes for the specific purpose of investing in securities. The hope is that the investment will not only pay the mortgage, but also generate additional income. Unfortunately, it does not always work out that way.
If a broker recommends this type of investment to you, be cautious. You could end up losing your home if your investments decline and you cannot meet your mortgage payment. Making a choice to take money out of your house to buy securities compounds your risk for the following reasons:
- When you buy securities with mortgage money, you are investing with borrowed funds. While this increases your buying power, it also increases your exposure to market risk, similar to buying securities on margin. The difference is your mortgage loan is likely to be greater than any amount a securities firm would loan you on margin. Investing borrowed mortgage money amounts to a huge bet that the investment will increase in value.
- Unlike investing with savings, when you invest with mortgage money, you stand to lose more than your principal if the investment goes wrong. You can lose the collateral supporting the loan – namely, your house. Even if you do not lose your house, you could lose the equity in your home that may have built up over a considerable period of time.
- 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 Better Business Bureau, along with NASD, suggest that investors ask themselves the following questions before considering a mortgage-financed investment:
- How will I pay for my mortgage or loan if my investments decline in value?
- Do I have a secure salary or reserve funds to make mortgage payments if my investments lose value?
If the answer is no, then this type of investment is not for you. If you have problems with a mortgage-financed investment recommendation that was not resolved to your satisfaction, you can file a complaint with the NASD’s Complaint Center at http://www.finra.org/complaint/.