Many investors are tempted to risk their homes by taking out second mortgages, re-financing, or obtaining a line of credit for the specific purpose of investing such funds when mortgage rates are low and the stock market is rising. Typically, the goal is to generate additional wealth while continuing to make mortgage payments. In more than most cases, investors who fail to achieve this ambitious objective end up defaulting on their mortgage. This is why investors must consider the risks associated with "betting the ranch" before they move forward with making such a bold investment decision.
Investing in any type of security entails risk to principal. Using home equity to buy securities compounds this risk in a few different ways. First, when an investor buys securities with mortgage money, he or she is investing with borrowed funds. This action increases the investor's exposure to market risk, similar to buying securities on margin. However, the mortgage money will most likely be greater than any amount a broker-dealer would lend in a margin account. Second, when an investor uses mortgage money to purchase securities, he or she risks losing the principal invested along with the underlying collateral - namely the house. Even if the home is not lost, the investor could lose a significant amount of home equity, which might have taken decades to build up. Last, investors usually maker riskier investments, or investments that offer higher than average yields, to surpass their mortgage rate. If the given investment yield is unsatisfactory, investors may feel compelled to place the money in an even riskier product.
The classic example of investors using mortgage money to purchase securities involves a retired couple who wants to earn a higher income by using the equity in their mortgage-free home. The couple will take out a new mortgage at an interest rate of 6% with hopes of paying the loan and earning more income. On the advice of their broker, the couple will invest in a mutual fund with an average return of 12% over the past five to 10 years. However, instead of posting a gain for that year, the fund loses 15 percent of its value. Since the couple was depending on earning a profit from the fund to pay their mortgage debt, and they have no other assets, they are faced with a tough choice - sell the depleted investment to be able to make mortgage payments and hope that the fund will be profitable soon, or they can sell the house and hope that the price is enough to pay off the outstanding mortgage. Either way, the couple risks losing their home.
If a broker recommends that an investor should consider using home equity to invest in securities, the investor can avoid financial calamity by asking herself a couple simple questions: 1) Will I be able to make mortgage payments in the value of my investments decline?; or 2) Do I have a secure salary or other funds to make mortgage payments if the value of my investments decline? If the answer is no, just say no to betting the ranch on securities.
Have you lost or risked losing your home as a result of your broker's recommendation to use home equity to invest in securities? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.
Investing in any type of security entails risk to principal. Using home equity to buy securities compounds this risk in a few different ways. First, when an investor buys securities with mortgage money, he or she is investing with borrowed funds. This action increases the investor's exposure to market risk, similar to buying securities on margin. However, the mortgage money will most likely be greater than any amount a broker-dealer would lend in a margin account. Second, when an investor uses mortgage money to purchase securities, he or she risks losing the principal invested along with the underlying collateral - namely the house. Even if the home is not lost, the investor could lose a significant amount of home equity, which might have taken decades to build up. Last, investors usually maker riskier investments, or investments that offer higher than average yields, to surpass their mortgage rate. If the given investment yield is unsatisfactory, investors may feel compelled to place the money in an even riskier product.
The classic example of investors using mortgage money to purchase securities involves a retired couple who wants to earn a higher income by using the equity in their mortgage-free home. The couple will take out a new mortgage at an interest rate of 6% with hopes of paying the loan and earning more income. On the advice of their broker, the couple will invest in a mutual fund with an average return of 12% over the past five to 10 years. However, instead of posting a gain for that year, the fund loses 15 percent of its value. Since the couple was depending on earning a profit from the fund to pay their mortgage debt, and they have no other assets, they are faced with a tough choice - sell the depleted investment to be able to make mortgage payments and hope that the fund will be profitable soon, or they can sell the house and hope that the price is enough to pay off the outstanding mortgage. Either way, the couple risks losing their home.
If a broker recommends that an investor should consider using home equity to invest in securities, the investor can avoid financial calamity by asking herself a couple simple questions: 1) Will I be able to make mortgage payments in the value of my investments decline?; or 2) Do I have a secure salary or other funds to make mortgage payments if the value of my investments decline? If the answer is no, just say no to betting the ranch on securities.
Have you lost or risked losing your home as a result of your broker's recommendation to use home equity to invest in securities? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.
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