Can I use a home equity loan to buy cryptocurrencies?

The popularity of cryptocurrencies has grown rapidly, with 16% of Americans reporting that they have used or invested in them, according to Pew research. While fortunes have been made in recent years investing in cryptocurrencies, recent market crashes have cost investors hundreds of billions of dollars. If you’re looking to invest in crypto and don’t have the cash, can you borrow against your home equity to do so? Yes, but read this first.

key takeaways

  • You can use the money from a home equity loan for any purpose you want, including investment.
  • For borrowing to invest to make sense, your investment must grow at whatever interest rate is higher than what you’re paying on the loan.
  • Cryptocurrencies are an extremely volatile asset class and earnings are not guaranteed.
  • If you can’t pay 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 have built up in your home. You repay 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 would on unsecured debt, such as a credit card or personal loan.

However, because the loan is secured by your home, you run the risk that if you can’t keep up with your payments, the lender could foreclose and you could lose your home. Also, if home prices drop and your home’s value declines to the point where you owe more money than it’s worth, you’ll be “underwater.” That can make it difficult or impossible to sell your home unless you can get additional money to pay off your lenders. This situation happened to thousands of Americans during the financial crisis of 2007-2008.

To qualify for a home equity loan, you’ll need to have at least 10% equity in your home (and often 15-20%), a good credit score, and proof of enough income to pay off the loan. The most you can borrow will be a percentage (such as 80%) of your principal.

How it works to invest in cryptocurrencies with a home equity loan

Lenders generally do not place restrictions on how borrowers can use the proceeds from their home equity loans. So there is technically nothing to stop you from staking a large chunk of the equity you have built up in your family home on 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 appear every day.

Initial Coin Offerings (ICOs) can be especially risky. A recent academic study analyzed almost 6,000 of them and estimated that 40% were scams.

The risks of investing in cryptocurrencies

In order to invest 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 factoring in Account for applicable taxes on any investment earnings. 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 cryptocurrencies and you’re in the 15% capital gains tax bracket. If you take out a loan at 6% interest with no fees or closing costs, you’ll need your cryptocurrency investment to grow at an average annual rate of at least 7.06% to break even. That’s after accounting for home equity loan interest and capital gains tax on your crypto earnings.

If you are lucky, your investment in cryptocurrencies will grow at a much higher rate. But don’t count on it. While cryptocurrencies have generated spectacular returns during certain periods, they are also exceptionally volatile, prone to big ups and downs. By mid-June 2022, for example, Bitcoin was down 50% YTD. Other cryptocurrencies have fared worse. During that same time frame, TerraUSD, one of the so-called stablecoins, 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 cryptocurrencies.

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, just like taking out a home equity loan for any other purpose, you’ll be putting your home at risk. While real estate may seem like a safer and less exotic investment than cryptocurrencies 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 on my home equity loan?

Under current law, you can get a tax deduction for interest payments on a home equity loan only if you use the money to “purchase, build, or substantially improve” the home that secures the loan. For people who use a home equity loan to invest in cryptocurrencies, no tax deduction applies.

The bottom line

You can use a home equity loan to buy crypto, but it’s extraordinarily risky and could put you out on the street. While the gains with some cryptocurrencies have been significant (at least in recent years), the losses can be devastating, and they have been recently. If you wouldn’t borrow against your house to bet on black at your local roulette table, you shouldn’t be doing it to buy crypto.

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