If you'd like us to answer one of your investing questions in our weekly Ask The Expert Q&A column, email us at [email protected]. (Note: We will not respond to requests for stock picks.)
Question: Should I ever mortgage my home for an investment?
-George K., Miami
The Investing Answer: Remember how good it felt it to pay off your mortgage the first time? You've heard of mortgage-burning parties, but you've never heard of mortgage-starting parties.
Michael Eisenberg, CPA and personal financial specialist, wouldn't mortgage his home to get into an investment.
'A home is first and foremost for enjoyment and shelter,' he says. And let's face it, in the last few years we've learned that values of homes could go down.
Worst case scenario: The investment goes belly up, and you're potentially upside down on your mortgage.
Eisenberg recalls a client who took out a reverse mortgage in which a lump sum or a monthly amount is paid to the homeowner in exchange for the equity in her home. His client chose monthly payments. She invested the monthly amount she received. It wasn't as bad as it could have been, but her heirs had to pay off the equity in the reverse mortgage after she passed away.
Whether the new mortgage is a reverse mortgage or a traditional mortgage, it's still borrowing against your home.
Still not convinced it's a bad idea to mortgage your home for an investment?
'Why would you want to start making payments when you weren't doing it before?' says Eisenberg. If you don't have the spare funds to make the investment without the mortgage, is adding another payment a good idea? If you don't have the money for the payments, you'd have to have instant skyrocketing of value for the investment to be worth it.
That's why Eisenberg's first question for a client is: 'Do you have the money for the payment?'
But it's not just about if you have the money now. Would you be able to make the payment if you were laid off in the future or took a pay cut? Adding a mortgage can add a good bit of stress in your life in an unforeseen circumstance that you don't currently have.
Now, let's say the answer is yes, you wouldn't have any problem making the payment. Then you have to think about the risk factor of the investment versus having your home debt free. 'There's a chance of an investment hitting it big, but how often does that happen? Where would you borrow future funds from for health purposes, etc., if you needed it?
Whatever you do, don't ask the bank whether taking out a new mortgage is a good idea. 'The bank will bend over backwards to give you a loan,' Eisenberg says. The bank makes money lending to you. That's why he says it's better to ask your CPA.
But there is a time when Eisenberg thinks it's OK to get a mortgage on a home: when it's a small mortgage on a big home. He provides an example of a couple living in a home that's worth $2 million with no mortgage. They're working and have cash flow. They can afford to make payments on a $100,000 home loan. Even if the investment goes belly up, it will have very little or no impact on their lifestyle.
Bottom line: Nobody should tack on a full mortgage to their home for an investment. However, if you have a really expensive home, it may be OK to take out a proportionately small loan. Only invest money, no matter how amazing the investment seems, that you can afford to lose.
