Cryptocurrency has grown rapidly in popularity, with 16% of Americans reporting using or investing in it, according to a Pew study. While fortunes have been made investing in cryptocurrencies over the past few years, the recent market downturn has cost investors hundreds of billions of dollars. If you want to invest in cryptocurrencies and don’t have cash, can you take out a home loan to do so? Yes, but read this first.

Key Findings

  • You can use the money from the home equity loan for any purpose, including investing.
  • For borrowing to invest to be worthwhile, your investment must grow at any interest rate above what you pay on the loan.
  • Cryptocurrencies are an extremely volatile asset class and returns are not guaranteed.
  • If you cannot repay your home equity loan, you could lose your home to foreclosure.

How real estate loans work

A home equity loan allows you to borrow against the equity you have accumulated in your home. You will repay the loan in fixed monthly payments over a set period of time, such as 10 or 20 years. By using your home as collateral, you can benefit from a much lower interest rate than you would get with unsecured debt such as a credit card or personal loan.

However, since the loan is secured by your home, you run the risk that if you fail to make payments, the lender could foreclose and you could lose your home. Also, if house prices fall and the value of your home drops to the point where you owe more money for it than it’s worth, you’ll be underwater. This can make it difficult or impossible to sell your home if you can’t find extra money to pay off your creditors. This situation happened to thousands of Americans during the financial crisis of 2007-2008.

To qualify for a home equity loan, you need to have at least 10% equity in your home (and often 15% or 20%), a good credit score, and proof of income sufficient to pay off the loan. The maximum you can borrow will be a percentage (eg 80%) of your capital.

How Investing in Cryptocurrencies with a Home Loan Works

Lenders generally place no restrictions on how borrowers can use their income from a home equity loan. So, technically, there is nothing stopping you from putting the majority of the wealth accumulated in your family’s home into the cryptocurrency of your choice.

There are thousands of cryptocurrencies to choose from on cryptocurrency exchanges. Bitcoin, Ethereum, and Tether are some of the best known, and new ones seem to be popping up every day.

Initial coin offerings (ICOs) can be especially risky. One recent academic study looked at nearly 6,000 of them and estimated that 40% of them were scams.

Risks of investing in cryptocurrency

For investing in cryptocurrencies (or anything else) with a home equity loan to make financial sense, you need, at a minimum, that your investment increases in value by more than the interest rate you pay on the loan, after accounting for applicable taxes. on any investment return. Under current regulations, cryptocurrency gains are taxed at the same rate as other capital gains.

Let’s say you borrow $40,000 to invest in cryptocurrencies and you are in the 15% capital gains tax bracket. If you take out a loan at 6% per annum without any fees or closing costs, you will need your cryptocurrency investments to grow at an average annual rate of at least 7.06% to break even. This is after accounting for interest on a home loan and capital gains tax on your crypto earnings.

If you are lucky, your investment in cryptocurrency will grow many times over. But don’t count on it. While cryptocurrencies have generated impressive returns over certain periods, they are also exceptionally volatile, prone to big ups and downs. For example, as of mid-June 2022, bitcoin is down about 50% year-to-date. Things are worse with other cryptocurrencies. During the same time, TerraUSD, the so-called stablecoin, lost about 99% of its value.

Can I use a home equity loan to invest in shares?

Yes, you can use a home equity loan to invest in stocks or anything else. Stocks are also volatile, but not to the same extent as cryptocurrencies.

Can I use a home loan to invest in real estate?

Yes, you can also use a home equity loan to invest in real estate. But just like taking out a home loan for any other purpose, you put your home at risk. While real estate may seem like a safer and less exotic investment than cryptocurrencies or stocks, it is rarely safe, as many Americans learned when the early 2000s housing bubble burst in 2007.

Can I get a tax deduction on a mortgage loan?

Under current law, you can only claim a tax deduction for interest payments on a mortgage on your own home if you use the money to “purchase, build, or substantially improve” the home that is collateral for the loan. For people using a home equity loan to invest in cryptocurrencies, the tax deduction does not apply.

bottom line

You can use a home secured loan to buy cryptocurrencies, but this is extremely risky and can leave you on the street. While gains with some cryptocurrencies have been significant (at least in past years), losses can be devastating – and have been quite recently. If you wouldn’t take out a loan against your home to bet on black at your local roulette table, you shouldn’t be doing it to buy cryptocurrencies.

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