Know the Risks of Using Home Equity Loans for Investing

Borrowing against your home might make sense in certain situations, such as to finance home improvements, but using your home's equity to invest is always risky and could jeopardize your financial stability. And the potentially high value of these loans can also make home equity a prime target for scammers. FINRA has seen an increase in reporting of fraudulent schemes involving home loans taken out for investment purposes.

Here are some things to know if you're considering using your home's equity to invest.

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Potential to Lose Your Home

Lenders offer different ways for homeowners to borrow money against the equity (ownership) they've built in their home, including home equity lines of credit (HELOCs), home equity loans and mortgage refinancing. Each of these methods involves taking out a loan that must be repaid with interest, in addition to fees and costs charged for these loans. Failure to pay on any loan against home equity can result in foreclosure, meaning you could lose your home.

While all investing involves risk, investing with money you've borrowed against your home includes extra risks:

• Investing borrowed mortgage money means placing a huge bet that the investment will increase enough for you to realize a profit after paying back your loan principal, interest and other loan and investment-related costs.
• You can lose more than your principal if you invest using borrowed funds. If your investment doesn't perform as you'd hoped and you can't repay your loan, you can lose the collateral supporting the loan--in this case, your house. Even if you don't lose your house, you could lose the equity in your home that you might have built up over many years.
• Certain home loans and HELOCs might use variable or adjustable interest rates. In this case, the interest rate you're charged will fluctuate during the life of the loan and, if interest rates are rising, your payment amount might be more than you expected.
• In an effort to see returns that surpass the rate of your home loan, you might be tempted to put your money in higher risk investments than you'd typically select. Furthermore, with so much at stake, if a given investment does poorly, you might feel compelled to move those assets into even riskier investments to make up the difference, further jeopardizing your home, credit standing and overall financial health.

Impact on Your Financial Future

If you wind up struggling to repay the loan, this could negatively impact your credit score and your ability to borrow money in the future for other important purchases. Additionally, a drop in home values could result in you owing more than your house is worth (commonly called an "underwater mortgage" or "upside down house"), creating an even worse financial situation should you need or wish to sell your home.

Exposure to Fraud

In addition to facing risks involved with legitimate investments, you might find yourself the target of scammers. Learning to recognize their techniques can be your best defense.

Scammers often work to develop relationships with targets before encouraging them to borrow money in order to invest in high-risk securities, including crypto assets. They might promote an investment "opportunity" and even recommend specific third-party loan providers for homeowners to obtain the funds. Once a target has obtained a home loan, scammers encourage them to send funds or obtain crypto assets through a platform that turns out to be fake. Instead, the money has been sent directly to the scammers' crypto asset wallets or accounts.

Look out for red flags of fraud, including:

• unsolicited calls, texts or social media messages;
• promises of high returns with little or no risk;
• pressure to act quickly; and
• instructions to wire money to an unknown recipient.

Most investment-related scams involve unregistered people, platforms and/or products. Before sending any money or providing any financial information, independently research the seller and the product. Legitimate investment professionals must be registered or licensed with FINRA, the Securities and Exchange Commission (SEC) and/or your state securities or insurance regulator before they can sell you anything. Use FINRA BrokerCheck to research the background of investment professionals and firms you're considering working with.

Where to Go for Help

If you have questions or concerns about your brokerage account or investment recommendations you've received, contact the FINRA Securities Helpline for Seniors toll-free at 844-57-HELPS (844-574-3577) Monday through Friday from 9 a.m. – 5 p.m. Eastern Time.

To report potential fraud, or if you have information about other potentially fraudulent, illegal or unethical activity related to investing, contact local law enforcement and submit a regulatory tip to FINRA. It's also a good idea to promptly report cyber-enabled frauds and scams to the FBI's Internet Crime Complaint Center (IC3).

Learn more about how to recover from investment fraud.

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