Is this a sound investment model? (see below)?

My wife and I have 2 small kids, a comfortable savings and significant equity in our house which is our only debt (5.5% fixed over 30 years) We are each contributing the max in our employer 401k's and after all the bills are paid we have about $600 left over each month.

We are considering taking a $65k home equity loan at 7% for 15 yrs. and investing the cash in a mutual fund portfolio targeting a 10-12% return. We will use the $600 per month mentioned above to service the debt. With a 15 yr. time horizon we think the market should allow the expected return. I have limited financial knowledge but this seems to make sense. Am I missing something?

you are using borrow money to invest with which is a big no no. i would just use the 600 a month and invest that each month. you have to worry about paying it back. or losing your home if you can not pay it back. the choice is yours tough.

What you're doing has been done by many people in the past. There's always articles in the financial press how people totally screwed themselves this way!

Invest $600 a month automatically every month. Make sure your choice of mutual fund(s) is correctly proportionate to your asset allocation model. Never leverage your house. There are three things that kill investors;

Indecision
Fear
Greed
You've just touched on greed. This is not an insult (we've all been there). It's just not likely to be profitable.