Cryptocurrency has quickly grown in popularity, with 16% of Americans reporting they have used or invested in it, according to research by Pew. While fortunes have been made over the last several years by investing in cryptocurrencies, recent declines in the market have cost investors hundreds of billions of dollars. If you are looking to invest in crypto and don't have the cash, can you borrow against your home's equity to do it? Yes, but read this first.
- You can use money from a home equity loan for any purpose you wish, including investing.
- For borrowing to invest to make sense, your investment needs to grow at an interest rate greater than the one you're paying on the loan.
- Cryptocurrencies are an extremely volatile asset class and gains aren't guaranteed.
- If you can't pay back your home equity loan, you could lose your home to foreclosure.
How Home Equity Loans Work
A home equity loan allows you to borrow against the equity you've accumulated in your home. You pay back the loan with 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'd get with unsecured debt like a credit card or a personal loan.
However, because the loan is secured by your home, you run the risk that if you can't keep up with the payments, the lender could foreclose and you could lose your home. In addition, if home prices fall and your home's value decreases to the point where you owe more money on it than it is worth, you will be underwater on it. That can make it difficult or impossible to sell your home unless you can come up with additional money to pay off your lenders. This situation happened to thousands of Americans during the financial crisis of 2007 to 2008.
To qualify for a home equity loan, you will 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 back the loan. The maximum you can borrow will be a percentage (such as 80%) of your equity.
How Investing in Cryptocurrencies With a Home Equity Loan Works
Lenders generally place no restrictions on how borrowers can use their home equity loan proceeds. So there is technically nothing stopping you from wagering a large chunk of the equity you've built in your family's home on the cryptocurrency of your choice.
Initial coin offerings (ICOs) can be especially risky. One recent academic study looked at nearly 6,000 of them and estimated that 40% were scams.
The Risks of Investing in Cryptocurrency
For investing in crypto (or anything else) with a home equity loan to make financial sense, you need, at a minimum, for your investment to increase in value by more than the interest rate you're paying on the loan, after accounting for the relevant taxes on any investment gain. Under current rules, cryptocurrency gains are taxed at the same rate as other capital gains.
Let's say you borrow $40,000 to invest in cryptocurrency and you are in the 15% capital gains tax bracket. If you take out a loan at 6% interest with no fees or closing costs, you will need your crypto investment to grow at an average annual rate of at least 7.06% to break even. That's after accounting for interest on the home equity loan and capital gains tax on your crypto profits.
If you're lucky, your crypto investment will grow at a rate many times that—but don't count on it. While cryptocurrencies have delivered spectacular returns over certain periods, they're also exceptionally volatile, prone to large ups and downs. As of mid-June 2022, for example, Bitcoin was down about 50% year to date. Other cryptocurrencies have fared worse. During that same time frame, TerraUSD, a so-called stablecoin, lost close to 99% of its value.
Can I Use a Home Equity Loan To Invest in Stocks?
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 cryptocurrency.
Can I Use a Home Equity Loan To Invest in Real Estate?
Yes, you can also use a home equity loan to invest in real estate. But, as with taking out a home equity loan for any other purpose, you'll be putting your home at risk. While real estate may seem a safer and less exotic investment than crypto or stocks, it is rarely a sure thing, as many Americans learned when the housing bubble of the early 2000s burst in 2007.
Can I Get a Tax Deduction With My Home Equity Loan?
Under current law, you can get a tax deduction for the interest payments on a home equity loan only if you use the money to "buy, build, or substantially improve" the home that secures the loan. For people using a home equity loan to invest in cryptocurrency, no tax deduction applies.
The Bottom Line
You can use a home equity loan to buy cryptocurrency, but it is extraordinarily risky and could leave you out on the street. While the gains with some cryptocurrencies have been significant (at least in years past), the losses can be devastating—and have been quite recently. If you wouldn't borrow against your home to bet on black at your local roulette table, you shouldn't do it to buy crypto.