Wednesday, 20 December 2006

Home Equity Loans

Home Equity Loans, like all debt, need to be used responsibly. I've used a home equity loan to borrow funds to invest in my "Little Book" US Shares portfolio (actually, if you read the information available on the website, what I've got is called a HELOC in the US, rather than a home equity loan). After establishing how much home equity I had, I established a loan account and use this to fund each month's investment of $5000 worth of the particular stock I've chosen using the "Little Book" website. After 18 months I'll be fully invested with a loan balance of around $90,000 secured against my home equity. The stock dividends will help pay the loan interest, and, if all goes according to plan, the investment value will increase at a greater rate than the interest rate on the home equity loan. As with all types of borrowing to invest (aka "gearing" or "leverage") your gains or losses will be magnified by using "other people's money [OPM]" to invest, and you need to thoroughly "stress test" your plans against possible interest rate changes (if you use a variable rate loan), and problems such as ill health or unemployment.

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