Home Equity Myth

If you’re like most people, your home will be the biggest investment you ever make.

Many people have been led to believe that their home equity is their greatest asset, which may or may not be true, depending on a number of circumstances.

Your home equity is the value of your ownership position in your home. You can quantify the equity in your home by subtracting any outstanding mortgages from the market value of your property. The difference is the value of your interest in your home, the equity in your home.

Considering how important the equity in your home is, what is then the most advantageous way to wisely manage this equity throughout your ownership?

The best home equity management plan will differ from person to person and will depend largely on an assessment of your individual financial circumstances.

Hopefully, this article will give you enough information to help you plan wisely when it comes to managing your home equity.

How safe is your home equity?

Most people confuse security with stability. Money in the bank, certificates of deposit (CDs), and some savings accounts are stable in terms of never losing your money. But the biggest enemy of all these elements are:

  • Taxes
  • inflation and
  • opportunity costs

The biggest threat to your home’s equity is volatility (the up and down movements) of the real estate market. In the late 1980s and early 1990s, many homeowners around the world watched their home equity disappear before their very eyes. Thousands of homes were foreclosed on as people lost their jobs and couldn’t make their mortgage payments. As a result, most homeowners lost the value of their home.

An economic downturn today may be highly unlikely, but are there other external enemies to your home equity that you have no control over?

Simple factors like neighbors from hell or an incinerator being built down your road or even just a few blocks away can immediately affect the value of your home equity.

Another big threat is unexpected redundancy. If you run out of your cash reserves and find yourself without a job or source of income, this will put you in the most difficult position if you can’t keep up with your mortgage payments. Do you want to go to any mortgage provider and tell them,

“My house is currently valued at £350,000 and I only owe £225,000, so I have £125,000 of home equity. I have always had a job and kept up with my mortgage payments. I am a professional with qualifications, credentials, and references. It’s only a matter of time before I get another high paying job. Please loan me £20,000 of my estate capital to keep a roof over my family until I get well.”

What do you think will be the response from any lender?

“I’m an income lender, not an equity lender. I have charges on thousands of houses and I don’t want to own your house on top of it. Show me your ability to pay me right now and I’ll consider your application favorably.”

Your income is your evidence of your ‘ability to pay’.

Your home will most likely be repossessed if you are unable to pay your mortgage, no matter how small. The number one reason for repossessions or foreclosures is disability; reason number two is job loss.

The equity in your home is not certain.

How liquid is your home equity?

How easily can you convert your home equity into cash or separate it from your property? Can you cash it at any time? To convert your home equity into cash or separate it from your property, you must:

  • sell your house
  • Refinance the original mortgage
  • Get more advances from your current lender
  • Get a new first mortgage from another lender (Re-mortgage)
  • Get a second mortgage or
  • Get a Home Equity Line of Credit

The first option requires you to give up your home. The next three options require a financial subscription. Remember, lenders are income lenders, not capital lenders. They want to know how capable you are of paying them back the money you want to borrow. The possibility of being approved for a loan or any line of credit is when you do not need it. Ironically, this is when you look your strongest financially.

So it’s good advice to make sure you have a pre-approved home equity line of credit now, or cash in on some of your home equity for reserves you can access right away.

The equity in your home is not liquid.

Does your home equity earn a rate of return?

Don’t confuse your home’s equity appreciation with a rate of return on your home’s equity. The value of your home may appreciate, but it certainly doesn’t earn you a rate of return or interest.

Strictly speaking, your residential property is not an investment asset for that reason. In fact, it’s a liability because it’s something you pay for, it doesn’t generate income except when you choose to use the principal that accumulates on it.

When considering the smartest way to manage your home equity, keep the following in mind:

  • Your Home Equity Is Not Safe
  • Your home equity is not liquid
  • Your Home Equity Does Not Give You a Rate of Return

So your home equity is a dead asset. It is not secure, it is not liquid, and most importantly, it does not generate a rate of return. It’s a lazy asset.

Depending on your individual financial circumstances, there are compelling and compelling reasons to release your home equity for investment purposes. In fact, when you sit there, you’re incurring opportunity costs because your capital isn’t working for you like its money equivalent does, and you’re also not invested in a vehicle that will give you decent investment returns.

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