Some advisers in the financial community have begun to direct their clients to leverage or pull cash out of their new homes and invest that money into well diversified portfolios. The mere suggestion of this type of financial maneuver during such uncertainty within the housing market might sound foolish, but for those investors who consider themselves sharks the payoff may be worth it.
Interest rates on 30 fixed rate mortgages have reached record lows making borrowing money dirt cheap. Conceptualizing an investment battle plan can be extremely difficult and should not be finalized without running it past a certified financial planner, but here is an example of how it typically works. Say a homeowner takes out a $400,000 mortgage at 4.5% on their paid off home and invests in a portfolio that produces an annual return of 3.015% after taxes, the financial maneuver would present itself as a profitable gain. If you factor in national inflation ratios and write offs the borrower is essentially borrowing the money for free and profiting from the growth in the portfolio.
Currently, the only restriction in place is homeowners who do obtain a loan through their home cannot invest in municipal bonds and reap the benefit of the tax deductions on the mortgage loan and tax free income from the municipal bonds. Financial planners call this “Double Dipping“. There are some risks that are involved when borrowing money against your home and investing it. The most visible one being the need for your investments to consistently outpace the costs involved in borrowing the money.
Financial advisers suggest that the safest bet is to invest into well diversified markets, choosing large growth and small growth funds. A portion of your investment portfolio should also contain some sort of real estate investment. The market is primed for a rebound over the next 5 years and having a portion of your investment tied to the housing market will provide you the opportunity to reap the benefits that this type of investing offers.
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