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Don’t use your mortgage to invest in the stock market

People who invest in homes are very likely to also be investing in the stock market as well.

These people usually have plenty of money to play around on the stock market and do not need to use their homes as collateral.

But in a recent trend, more and more people are using their mortgage to invest in the stock market.

Many people in the industry are strongly cautioning against doing this, because the results could be disastrous.

The article, “Don’t use your mortgage to play the stock market,” by Ann Davis from The Wall Street Journal Online, describes the dangers associated with this gamble.

People who do not know much about both the mortgage process and the stock market are most vulnerable to getting sucked into what seems like a great way to gain wealth. But you could end up gaining nothing and losing everything.

“The National Association of Securities Dealers is investigating whether some brokerage houses are inappropriately pushing individuals to borrow large sums on their houses to invest in the stock market -- bets that in some cases have turned disastrous.”

“Recently, the NASD, the main self-regulatory arm for the securities industry, warned brokerage houses that they must take extra caution before recommending that any client take money out of a home to speculate in securities.”

There are countless risks involved with using your home to trade stocks.

The article uses an example of a 100% mortgage.

“In May of 2004, it singled out 100% mortgages in an investor alert. With these, homeowners may pledge securities they own as collateral in lieu of a cash down payment. For example, someone buying a $200,000 house could pledge $40,000 in stocks, which could make sense if the borrower was financially secure and wanted to avoid being forced to sell a good investment. If the stocks decline in value significantly, a brokerage house may require that the borrower continue putting new assets into the account, or he could ultimately lose his home, the NASD says.”

People that are not experienced with the stock market in detail may not realize the immediate risks of this, so it is important to be educated. The NASD just wants people to be aware of the fact that this is going on since they could potentially lose their home.

These cautions are coming at a time when people are taking more money out of their home than ever.

“In the recent warning, the NASD cited a recent Federal Reserve Board study that found homeowners are pulling money out of their property at greater rates than ever. From 2001 through the first half of 2002, 11% of total funds obtained from mortgage refinancings were used for stock-market and other financial investments. That is up from less than 2% during a previously studied period, through the first half of 1999.”

“The sums that people are pulling from their homes have jumped, too. In 2001 and 2002, the average amount used for investments was $24,000, up from ‘relatively small amounts’ in the earlier period. The $24,000 plowed into investments topped the averages for nearly all other categories for which people used proceeds, including home improvement.”

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