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I am going to buy a house soon. Paying 10% down. My credit score is > 800. I wanted to to take additional money in mortgage to put it in some low const index fund like SPY. The house is going to be my primary residence.

Is it legal to take additional money in home mortgage and not use it towards the house ? Do I need to disclose my intention about the additional money to the lender or do I tell them that I will use it for the furniture etc. ?

Edit: A lot of people think I am asking for investment advise, and are advising from that aspect. Investing is one's own choice by DYOR. I only asked if it was legal to do so, and seems like it is.

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    What is the difference you see between putting less down and investing that money vs. getting additional money from the loan? The bank isn't going to give you a 6 figure check, they're going to send that money directly to the title company when you close the loan. I see no reason that a cash-out purchase would be illegal but I've never heard of one. You could do a purchase loan and then come back and do a cash-out refi some time later if you have the equity but, again, that likely is not different than simply putting less money down.
    – Justin Cave
    Commented Sep 26, 2020 at 16:43
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    @NRL - Highly unlikely. You can certainly structure the sales contract so that the seller includes furniture or other goods and you can include that in the loan amount. But your appraisal isn't going to include that furniture (since the bank won't have a mortgage on the furniture) and no bank is going to hand you a check for $50k at closing unless your 10% down is way more than $50k (in which case you'd be in the same position as if you kept the $50k in cash and made a lower down payment). If you're getting back more than you are putting down, your loan-to-value would be > 100%
    – Justin Cave
    Commented Sep 26, 2020 at 17:59
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    which is something that banks learned in 2008 is a really, really poor idea that lead to lots of banks going bust.
    – Justin Cave
    Commented Sep 26, 2020 at 18:00
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    This seems like a way of thinking that is "trying to beat the system." When you make those attempts, the system often has unexpected ways to beat you instead.
    – Itsme2003
    Commented Sep 29, 2020 at 5:12
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    Aside from the fiscal foolishness of this idea, how is the bank going to agree to this? The house is the guarantee for the loan - if you can't pay, they get the house. If they loan you extra and you can't pay, the house isn't enough to cover the inflated loan so the bank loses money. The Bank Loses Money is a phrase that does not exist in the vocabulary of a bank manager.
    – Oscar Bravo
    Commented Sep 29, 2020 at 11:23

7 Answers 7

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It is legal, yes. Will your bank offer it? Probably not, especially if you're already talking about only putting 10% down. The most common way this is accomplished is with a Home Equity Line of Credit. You put money down, then take out a loan (at a slightly higher rate of interest, usually) for the equity you have. There will be limits on Loan to Value ratio totals. Also, your interest rate will go up with the less that you put down. Something to think about when trying to calculate if investing is going to give you higher returns than paying interest on a loan.

Getting cash out is far more common during a refinance than with an initial mortgage, but again is dependent on your loan to value ratio. Again, you're taking a loan against existing equity.

Something else to consider: will you be paying PMI (mortgage insurance) because you're putting less than 20% down? Seems that would eat into your theoretical investment gains.

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    I'd actually be rather suspicious of a bank that would loan money in such a scheme. It makes no sense for a bank to be underwater on a mortgage. Any bank that would offer this, is up to something...
    – Oscar Bravo
    Commented Sep 29, 2020 at 14:19
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As others have noted this is a bad idea all around. Just get a margin loan from your broker if you really want to trade stocks on leverage. That is what they are designed for. I will warn you that they can be very risky.

Don't tie up your home with your risky investments though, that seems like a recipe for disaster.

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  • Agreed. Property is solid like bricks, investments can lose money. What happens if the OP loses significant gains after he invested someone else's money? "Recipe for disaster" is a fantastic wording
    – usr-local-ΕΨΗΕΛΩΝ
    Commented Sep 29, 2020 at 14:55
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There are some 103% mortgage programs that I found. There were more available before the 2000's housing market collapse. These programs are designed to cover the price of the house plus closing costs. They do it my having a primary mortgage and a second mortgage. That 2nd mortgage is more expensive but if you throw money at it you can pay it off faster.

There are other programs where you can get money to purchase the house and money to make repairs at the same time. The lender assumes the repairs will increase the value of the home.They have a procedure in place to make sure you do get the repairs done.

what you are proposing, is the preservation of cash to be able to invest is generally done by limiting the amount of the down payment. You can then have a lump sum to invest. Of course if you borrow more than 80% you will have PMI costs.

It would be very rare for a lender to give your more than 100% of the value of the house, and then say do whatever you want with the funds.

Is it legal to take additional money in home mortgage and not use it towards the house?

There are two legal concerns:

  • If you and the seller conspired to make the purchase price appear higher, and then they gave you the extra funds that would be fraud. In other words take a 500K house, and make the paperwork show it is worth 600K; that makes the 80% loan amount 480K instead of 400K. That would be loan fraud.

  • Interest on loan amounts that aren't for the acquisition costs of the home, are not tax deductible. So loan proceeds for you to invest would not be tax deductible as a housing expense. If you also committed loan fraud to make it appear legitimate you could add tax fraud to the mix of charges.

Now if you found a lender and they allowed it, and you documented it properly on your taxes, it would not be illegal.

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  • In the great majority of cases, the mortgage lender relies on a third-party appraisal to establish the value of the property for LTV purposes, not the purchase price. So puffing up the purchase price like that isn't even a good way of defrauding anyone, it just makes it likely that you don't get approved for a loan at all. If it did go through, you'd take a bath in the taxes and commission on the added amount.
    – hobbs
    Commented Sep 28, 2020 at 19:28
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Think of it from the bank's perspective. When they give you a loan, they want to profit from it. Now how much they profit (on average) from a loan of a fixed length depends mainly on two factors: The interest rate and the risk of not getting some or all of their money back.

The interest rate is something they control, while the risk is more or less given to them by the type of loan (e.g. mortgage vs. consumer loan) and by how a reliable they judge you to be when it comes to payment (e.g. income, previous transactions and other debts in the form of credit rating and so on). So, if the risk is high, they will charge a higher interest to offset this (or decline to give you a loan), while for a low risk, the interest has to be lower as well, otherwise you'd go to a competitor instead.

Now the reason why a mortgage normally has a low interest rate is that it is a low risk investment for them, because there is a house involved as a security. Even if you somehow manage to bankrupt yourself, they'll still can get their money back by selling the house. So from this point of view, they do not care what you use the money for or how much you pay down. The one thing they care about is that there is water-tight paperwork that allows them to recover all debts by selling your house if they have to.

Everything else is just a consequence. For example they'll send the money directly to the seller not because that specific money needs to be used specifically for this, but simply because both transactions need to happen at the same time. They don't want to hand out the money before you own the house and the seller won't give it to you until the money is there. And in particular they want to make sure that they can sell the house for more than what you owe them.

If you consider the costs involved in selling a house and possible missed interest payments, what you owe them in the end might be more than the initial loan. Similarly, the house might loose in value due to lack of maintenance or a general bad real estate market. This is where the down-payment comes from. To cover for those eventualities, they simply want the total amount of the loan to be lower than what the house sells for in order to make sure they can recover everything. Your down-payment then simply covers the difference.

Now this finally gets us back to your question. If you want to take out more money to invest somewhere else, the difference between loan amount and house price gets smaller. Thus the bank runs a higher risk of not getting their money back and to offset this, they'll increase your interest rates. Think about it: From the point of view of the bank, taking out an additional 5% of the buying price for something else is identical to you just getting a loan with 5% down-payment instead of 10%.

They might still want to do it, but to compensate for the risk, they'll increase the interest rate accordingly. It might have worked for going from 60% to 40% down-payment, but this close to the full buying price the additional risk for them will be nearly as high as for an unsecured loan, so you are unlikely to make profit of this.

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I'll give you the short answer.

Yes, it's legal to borrow more than you think you need. You are free to invest your savings as you see fit.

From a purely financial perspective, you need to ask yourself whether you are better off having your wealth tied down in the stock market, or your house.

If the past is any guide to the future, stocks AND real estate are likely to do well in the years to come, now that interest rates lower than they were in the aftermath of the financial crisis.

Good luck with your purchase :-)

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  • It's legal to borrow however much you like. The trick is finding a lender stupid enough to loan you money to play the stock market, knowing that you're a rookie. No bank would offer the OP cash in the circumstances he described. As for your fortune-telling about the market, in today's uncertain times?, that's just wishful thinking.
    – Oscar Bravo
    Commented Sep 29, 2020 at 11:32
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This isn't uncommon in Canada. We've got a mortgage on the house combined with a HELOC that fluctuates but always stays around 80% of the value of the house. As the mortgage is paid down, the HELOC limit increases, which we then use to invest in dividend paying ETFs. Those dividends are then used to pay down the mortgage (also called a Smith Manoeuvre). It's a faster way to pay off the mortgage, and make the interest tax deductible (which it isn't in Canada like the USA).

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It's actually not that uncommon to take some extra money when taking on a mortgage for a home. But the reason is usually not to invest it. The reason is that moving is expensive. You are going to need money for:

  • Renovating your new home to your liking
  • Renovating your old home, so it's fit for selling / to appease your landlord
  • Moving all your stuff
  • Buying new furniture
  • Paying for two homes during the time you are moving from one to the other
  • So much small stuff you didn't think about

You will be surprised how fast you can burn through a couple thousand dollar while moving into your new home.

Banks know that, so they will be prepared to give you a little more than you need. But after you got the money, nobody is going to check what you are actually spending it on.

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