A by-the numbers look at betting your house
By Michael D. Larson • Bankrate.com

So does tapping home equity to invest make sense? Probably not. Unless the economy performs as well over the next several years as it has during the past few and their stock picks work out just right, borrowers can easily lose money -- to say nothing of their homes!

Consumers are better off taking the money they would have paid toward interest on their lines of credit and investing it instead. As Phyllis Carlton, a certified financial planner at Capital Management Consulting in Portland, Ore., points out, that can leave homeowners more than $35,000 ahead after 10 years. Plus, they won't have loans to pay off down the road.

Some things to keep in mind: Incidentals such as a $50 per year fee for keeping a line of credit open and closing costs, which borrowers sometimes have to pay and that usually come to a few hundred dollars, could whack another $800 to $1,000 off the borrower's gain. Other variables could alter the profit/loss equation, too. If the borrower bought a dividend-paying stock, for example, the overall return might be better. But if the borrower chose a mutual fund, the tax bite might be worse because short-term capital gains tax payments could be required.

The biggest caveat of them all is perhaps the most obvious, yet it bears repeating. There's no way to say how much a given investment will rise or fall in value over the course of 10 years. When you add in the risk of leverage, any gains will be magnified, but so will any losses.

EXAMPLE:

• Home value: $150,000
• First mortgage remaining balance: $100,000
• New home equity line of credit (HELOC): $30,000
• Overall loan-to-value ratio: 87%

For the sake of argument, let's leave out the payment and rate on the first mortgage. Then, let's take the average HELOC rate Bankrate.com found in early May (8.56 percent) and assume a 10-year loan term and no changes in the variable interest rate over the life of the loan. If the person elected to pay interest only, the monthly payment would be $214. Total interest costs over 10 years would be $25,466, but if we assume the person is in the 28 percent tax bracket, the after-tax interest cost would be $18,366.

When the investment gains
Now, let's assume the person uses the $30,000 line proceeds to buy 1,000 shares of ABC Corp. for $30 each. If the investment gains 10 percent a year, the person would have $77,812 after 10 years. Factor in the 20 percent long-term capital gains tax on the $47,812 gain and you get a tax bite of $9,562. That drops the total after-tax investment value of $68,250. Then you factor in the repayment of the $30,000 loan principal, which reduces your money to $38,250. Then, knock out the interest costs of $18,366 and you get a net gain of $19,884.

If it loses
But what if the stock fell in value to $20,000 over those 10 years? That's a decline of just 33 percent. That person would end up having to pay back $30,000 with $20,000 in cash raised from selling the shares, leaving them with a $10,000 loss. Factor in the $18,366 in after-tax interest costs and they end up with a net loss of $28,366.

An alternative
One financial planner points out that someone with $214 a month laying around to make interest payments should just invest that instead. By starting with that amount and comitting it every month for 10 years, an investor could accumulate $44,392 pretax assuming a 10 percent return. Knock out $8,878 for taxes and you're talking about $35,514 -- with no loan to repay!