House equity investment question?

Certainly there is the possibility of netting an extra 2% off the equity in your home. There is also the possibility of making a really big mistake. I personally am not a believer in using home equity for investing in the stock market. I think it is too risky. This is certainly an extreme example but let me use it anyway. Suppose you had done that in 2000 and pulled 100k out of your equity and invested in growth stocks of the era. You would still be in the whole 7 years later. Maybe in the whole big time if you had invested in the likes of Intel, Cisco, and God forbid World Com.

Pay off the mortgage, and don't borrow against the equity. Just let the equity build up. Then, when you retire, sell the house to get cash to buy a retirement home (for cash--don't borrow in retirement if you can avoid it).

As you approach retirement, you should lower your financial risks. This is because you have fewer working years to recover in case something goes wrong. Borrowing against your equity to invest in, say stocks, could be counterproductive. Yes, there are mathematical calculations that could be done to show that you'd be better off borrowing against the equity and investing in stocks. But that strategy works best if you have 30 more working years to go, so you can ride out any stock market downturns.

Assume you decided to get a 2nd mortgage (10 yr term, 7.20% interest) of $80,000. You would now owe $200,000 on a $250,000. You would have to pay an additional $937.14 a month (or $112,456.80 over a 10 year period). You would be paying an additional $32,456.80 in interest and depending on your purchase price, some of t hat interest may not be deductible. Your $80,000 that you invested would have to earn at least enough after taxes to cover the after tax interest cost on the 2nd mortgage just to break even.

Or you could do nothing and in 10 years you will have a home worth $250,000 plus appreciation and have no mortgage. Assume an annual appreciation of 1.5%, the home would be worth $290,00 and you would net more than $271,000 tax free after selling expenses. If you purchase a home for less money, you can add the difference to your retirement savings.

You have some options available to you, since you have equity. You can leave it there and later sell your house and get it that way, or you can pull it out and invest it wisely and let it pay you. You will be paying interest on the additional monies that you owe on your home, but you will also be collecting interest on it, as well as taking the tax benefit. A good mortgage planner can personalize a plan for what mortgage will be most beneficial for your goals, and then a good financial planner can advise which markets to invest your monies into, that will acheive what you want. Each persons situation is different, and the goals differ as well, so a personalized plan is best. For investments I would look at municipal bonds, as they seem to be relatively safe.

Having a paid off house at retirement is a good start.

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