Some people say that owning your house outright is a waste of money. They argue that you can earn better returns on the cash than you earn having the money sit in your home.
There are merits to this argument, but there are faults as well. So, the question is, should you pay off your house in full or refinance and use the cash elsewhere?
If you are on the investment side, using your home as leverage, you keep loans out on your house indefinitely through re-financing and home equity loans. These loans generally have very low interest rates as they are secured by your house. If you have a 7% loan and you can make 9% per year in the stock market, you are better off by investing and making a 2% profit over what your loan interest rate is.
This does not go without risk. If you have a bad spell in the market and lose a lot of money, you are far worse off than had you paid the money into your loan. In a worst case scenario, you lose so much that you cannot pay your loan and you lose your house!
As you might guess, I am an advocate of paying for your loan as quickly and early as possible. I have a car loan out right now that I am over 12 months ahead on. It is a 5 year loan and I am on track to pay it off in about 3 years.
If you are cocky, you might make leveraged investments using a margin account or your home to bankroll your stock picks. This can pay off big, but it can lose bigger. If you are considering this route, consider the risks and benefits. I say the risks are far worse.
Do you investing using leveraged investing? Why or why not? Let us know in the comments.
