You’ve built up a lot of equity in your house. The S&P 500 returned 26%, 25%, and 18% the last three years. Easy solution: borrow against the house, put the money in an index fund, and let the market outrun the loan. Right?
At today’s rates, for most homeowners, I’d skip it. Here’s the math that got me there.
What the loan costs you
Home equity rates climbed after the Fed’s September hike. Bankrate’s Sept. 23 survey put the average 10-year home equity loan at 8.49% and the average HELOC at 7.28%.
Borrow $100,000 on that 10-year loan and you’ll pay $1,239 a month, $48,719 of it in interest.
The S&P 500 has averaged about 10% a year since 1957, according to Fidelity. That leaves about a point and a half between what the loan costs and what the market has paid historically. In other words, you’d be putting your house up as collateral to chase 1.5%.
The better option: invest the payment instead
If you can afford a $1,239 payment every month, you can afford to invest $1,239 every month without borrowing a dime. That’s dollar-cost averaging, and it’s the real choice here. Borrow $100,000 and put it all in today, or skip the loan and invest the payment a little at a time.
Here’s how both play out over 10 years:
| What the market does | Borrow $100K and invest it | Invest $1,239 a month instead |
|---|---|---|
| Averages 10% a year | $259,374 | $249,671 |
| Matches the 8.49% loan rate | $225,890 | $230,536 |
| Repeats 2016 to 2025 | $398,329 | $333,185 |
| Repeats 2007 to 2016 | $195,681 | $265,187 |
| Repeats 2000 to 2009 | $90,883 | $156,574 |
Borrowing only wins when the market beats your loan rate, and even an average decade only puts you about $9,700 ahead. In a decade like 2000 to 2009, you’d pay $148,719 on the loan and end up with $90,883.
Why a little at a time wins here
I want to be straight with you, because you’ll run into the opposite argument online. When the money is already sitting in your account, investing it all at once usually beats spreading it out. Vanguard found that a lump sum beat spreading the same money over a year 68% of the time from 1976 to 2022.
Borrowed money flips that. Cash you already own costs nothing to hold. Borrowed cash costs 8.49% from the first day, so the market has to clear that bar before you earn a dollar.
Dollar-cost averaging also protects you from bad timing. When the market drops, your next $1,239 buys more shares at the lower price. A lump sum takes the whole hit at once. In the 2007 to 2016 row, the borrower’s entire balance took the 37% drop in 2008. The monthly investor kept buying through it and finished $69,506 ahead.
Why the bad decade hurts more than the good one helps
On paper the swings look even. You come out about $65,000 ahead in a great decade and about $66,000 behind in a bad one. They don’t play out even, for two reasons.
- The payment doesn’t pause when the market drops. You still owe $1,239 the month the market falls, and every month after it. Down years aren’t rare, either. 26 of the last 100 calendar years ended negative, about one in four.
- The collateral is your home. Texas home equity loans are non-recourse, so the lender can’t come after you personally. The only thing they can take is your house.
The Texas rules that cap how much you can pull
Texas protects homesteads harder than most states. Under Section 50(a)(6) of the Texas Constitution:
- Everything owed against the house can’t top 80% of its value. On a $500,000 house with $300,000 left on the mortgage, $100,000 is the most you can borrow.
- Fees can run up to 2% of the loan, not counting the appraisal, survey, and title costs. That’s up to $2,000 more on a $100,000 loan, which isn’t in the table above.
Don’t count on the tax deduction
Home equity interest is deductible as mortgage interest only when the money goes toward buying, building, or substantially improving the home, per IRS Publication 936. Index funds don’t count. The interest may still qualify as investment interest if you itemize. Ask your CPA before you borrow, not after.
If you’re still tempted
If you believe the next decade will look like the last one, the table says borrowing wins. Most people in 2007 didn’t see 2008 coming either.
If you go ahead anyway, use a fixed-rate loan so you aren’t making a second bet on rates. Keep at least six months of payments in cash, so a bad year never forces you to sell at the bottom. And run it past a fee-only financial advisor first. I’m a Realtor, not a financial advisor.
If the real goal is a bigger house instead of a bigger portfolio, that’s a different use of your equity. Here’s how to decide whether to buy first or sell first.
Start with your real number
All of this depends on how much equity you actually have. Texas is a non-disclosure state, so the online estimates are working without public sold prices.
Not sure what your equity looks like right now? Check it here.
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Math notes: 10-year fixed loan at 8.49%. The table uses each year’s S&P 500 total return, compounded monthly, with monthly investments made at the start of each month. Taxes, fund fees, and loan fees are left out of both columns. Sources: Bankrate home equity loan rates, Bankrate HELOC rates, Fidelity, S&P 500 annual total returns, Vanguard, “Cost averaging: Invest now or temporarily hold your cash?” (2023), Texas A&M Real Estate Research Center, IRS Publication 936.
