Home Equity
By nationwidepi
The author has permitted the reprinting and redistribution of this
article.
The “American Dream” is and has been to own your
home free and clear without any mortgage payment.
If this dream is still valid today, how can it be explained that
thousands of financially successful Americans, who have the funds to
pay off their mortgage, choose not to. The American Dream has been
passed down to us by our parents and grandparents alike. Many Americans
fear a home mortgage, particularly when they are at retirement age.
This way of thinking is very outdated, although valid back in the
1930’s. During the great depression, banks were legally able
to call a mortgage loan due in order to receive a much needed cash
infusion. The stock market had lost over 75% of its value,
un-employment was at an all-time high, and real estate values were
falling dramatically. Many homeowners lost their homes because they did
not have the funds to pay off their mortgage and they could not sell
the home because there were no buyers at the time. Due to this horrific
situation, a new way of thinking was born. “You should own
your home and never carry a mortgage”. This way, if the
economy dropped suddenly and you lost your job, you would at least have
a roof over your head. Since then, laws have been past that make it
illegal for banks to call your mortgage loan due.
Today, it is no longer the case that we will live in our homes for 30
years and keep the same mortgage for 30 years until it is paid in full
like our grandparents did. Today, the average person lives in their
home for only seven years and according to the Federal National
Mortgage Association, the average American mortgage lasts for only 4.2
years. People are moving to larger homes in better areas as well as
refinancing for a better rate or to pull equity for home improvements
and other expenses. These statistics show that it makes little
financial sense to pay down your mortgage by applying additional
principle payments and to have large amounts of equity in your home.
Ask yourself these two questions What rate of return do you receive on
the equity sitting in your home Would you burry $100,000 cash in your
backyard The answer to the first question is 0 or nothing! For question
two, most people would answer NO, however, a vast majority of home
owners across the US are basically doing just that by leaving the
equity in their homes.
Rather then allow your cash to remain dormant, pull that equity out and
utilize it in any number of great investments. One option is real
estate. You receive tax benefits such as depreciation, cash flow and
property appreciation. Another option would allow you to invest those
funds as a private mortgage loan secured by real estate and earn double
digit returns on your money collateralized with real estate. Both of
these options make you money! Isn’t that much better then
having the equity sitting in the walls of your home making you nothing
Even if you were to pull $100,000 of equity from your home in the form
of a Home Equity Line at an interest rate of 7% ($7,000 annual cost)
and placed those funds in a safe interest producing asset which
produced a return of 7% ($7,000 annual gain), would you be exactly even
at this point The answer is NO! The interest you pay on your equity
line is tax deductible (mortgage interest is 100% tax deductible in
most circumstances) therefore, the true cost of the 7% loan is actually
only 4.55% (assuming a 35% tax bracket). It is not difficult at all
these days to find an investment vehicle which produces a 7% return.
Another problem with all that equity sitting in your home is that if
sued you risk losing it. You want to look cash poor when an attorney
looks at your assets. If liens show up against your homes and it
appears you have very little or no equity then it may keep you away
from a lawsuit. Most attorneys won’t work for free. If they
can’t find a way to get paid through your assets then they
won’t file the lawsuit.
In closing and most importantly, it is a very wise decision to separate
the equity from your home to prevent losing it. If you have an equity
position in your home and the home values in your area decline, you
will lose that equity. If you separate it from the home, via an equity
loan for example, you secure the equity by converting it to cash which
then may be used for safe & conservative investments. According
to a recent study, 67% of Americans hold the majority of their net
worth in personal home equity. If we were ever taught to diversify our
investments, this statistic shows a failure to practice that advice.
Will Barnard - Managing Partner - Nationwide Property Investments, LLC -
If
you would like to take advantage of the market and learn how to invest
in real estate and you are local to the Dallas Fort Worth area, I know
a really great teacher and mentor here in Arlington Texas. Please take
a look at his web site: DennisJHenson.com,
Dennis has a great Mentoring and training program, I know because I am
one of his former students. I learned a lot from his one on one
teaching technique. - Michael Harman 817-457-7572
mchfun.business@gmail.com
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