Cash Out Now!

The wisest choice when investing is often the toughest choice. Today that means buying stocks even if you have to mortgage the house–literally. Your financial adviser probably won’t tell you so, for fear of being fired on the spot. Stocks, down more than 40% from their peak, are that tough a sell. But everyone who has a lot of time until retirement, little debt and a whopping gain in real estate ought to make the most of their home equity by extracting some and wading into equities.

Crazy? Not at all. Think of it in basic rebalancing terms. Three years ago, stocks had soared, bonds had been creamed, and cash was for wimps. Rigorous rebalancing would have had you sell stocks and buy bonds and cash equivalents to keep your overall asset mix in line–a move that today would look like genius. Now throw real estate into the mix. Soaring home prices have left millions of homeowners–especially on the coasts and in hot cities like Denver–sitting on piles of loot. Lately, prices have been cooling in some cities. But that’s after doubling over five years in the hottest markets. The median home price nationally is up just 30% over five years. Still, with a typical down payment and purchase price, that amounts to a doubling of home equity.

There’s a deja vu feel to all this. Is housing headed for the kind of bust that stocks have suffered? The heady growth of recent years is clearly over, and prices may soften over the next few years–both good reasons to take something off the table. But it’s a good bet that the rate of household formation (growing) and supply of desirable building lots (shrinking) will underpin the market for years. So if you’re not planning to move soon, the home equity you’ve built should be put to better use.

Beware an addition to your home. It makes sense if you need space. But home improvements are usually a poor investment, and they leave you with even more riding on the real estate market. Some envision selling their houses now, living in a rented place for a while, then buying a different house on the cheap later. But to offset transaction costs, on average, home prices would have to drop 20%–and you’d have to time it nearly perfectly.

How do you go about redeploying home equity into stocks? Stick to low-cost, broad stock-market index funds, and to get over your understandable jitters, divide the pile into six equal parts to be invested over that many months. “We recommend that no one asset account for more than 25% of your total assets, including the total value of your house,” says Gary Greenbaum, a financial planner in Old Tappan, N.J. Plenty of folks live in homes worth $800,000 that they bought for $400,000 less than 10 years ago. But their stocks have shriveled. As long as overall debt remains manageable (less than 30% of total assets), you could easily afford to borrow $100,000 against the house and invest it. To lock in low rates, consider a fixed-rate home-equity loan or cash-out refinancing. “Five years from now, you’ll laugh at how risky buying stocks seemed today,” says Jere Doyle at Mellon Private Wealth Management in Boston.

What else could you do with your home-equity kitty? Consider a small business. This isn’t for everyone; most start-ups fail. But home equity can be a lifeline for executives who are out of a job but able to earn a living as consultants once they set up an office. In a survey of home-equity borrowing, the Consumer Bankers Association found that dollars spent on things in its “other” category–of which business investment is a main component–has jumped to 24%, from 10% last year.

If you have mortgages on two properties, you may have enough equity to consolidate them under your primary residence and eliminate the typically higher interest rate on a vacation home. Bob Graef, president of Graef Financial Group in Tarrytown, N.Y., recently did that for a client for a different reason. Removing the debt simplified putting the beach house in trust, making sure that it stays in the family for generations. Now that’s using your equity.