Welcome back to the Money Wisdom Question Series. Today’s question is, when would it be beneficial to borrow against my assets? While there are ways to borrow against assets such as a vehicle, we’re going to focus on three main asset considerations.

Join Jake Doser, CFP®, CPWA® as he takes a closer look at the pros and cons of borrowing against your home, your 401(k), and your investments.

Borrowing Against Your Home

Borrowing against your home is what most people think of when it comes to asset-based lending. While you may be under the impression that it’s a significant burden to carry a mortgage into retirement, it can be risky to have most of your wealth tied into your home equity while lacking readily available cash. Without enough assets in the bank and in investments, you may find yourself struggling to facilitate an emergency fund or an unexpected expense.

There are instances when borrowing against your home in exchange for maintaining liquidity is beneficial. Certainly, borrowing and when interest rates are high is not favorable. But when interest rates are lower, your investments could very easily outperform the interest that you’re paying, and in that environment, it may be advantageous to borrow against your house.

Borrowing From Your 401(k)

While it’s less common to borrow against a retirement account like a 401(k), in an emergency, it is certainly worth considering. Depending on your employer’s plan, you can usually borrow up to 50% of the value of your 401(k). However, in this scenario, you’ll be paying interest and taking out the opportunity earnings of your plan. You don’t want to limit yourself by avoiding market-exposed growth over the long term. Oftentimes, it may be better to borrow against a 401(k) rather than getting yourself into credit card debt or taking out a personal loan due to interest rates. But outside of those circumstances, it is best to avoid doing so if you are able.

Borrowing Against Investments

Referred to as margin borrowing, the niche practice of borrowing against your investments can be a dangerous proposition. If your platform allows it, you will not only be paying interest to the financial institution, but also, if your investments suddenly drop in value, you could find yourself upside down. A margin call will then be issued by the institution informing you that your borrowing limit has been reduced, and you must pay up immediately. Our best recommendation is to almost never consider borrowing against your investments. Of the three assets that we’ve covered, this is the least favorable option.

Understand Your Options

Borrowing against your assets can come with several risks. It’s important to make sure you understand your options and have a solid financial plan in place. Working with a financial advisor can help take the uncertainty out of your decision. Together, you’ll create a strategy that aligns with your unique financial situation and long-term goals.