Sunday, September 20, 2009

Unlocking the Value of Your Home

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy.

What a great sounding idea: unlocking the value of your home. Whenever I hear this phrase, I picture piles of cash stored in my walls. What could be more reasonable than taking some of this cash out to make my life better?

I usually hear advice about unlocking my home’s value from a bank that wants to sell me a loan or a financial advisor who wants to sell me mutual funds. But, so what? Do I really need to have so much of my money tied up in real estate?

Some financial advisors even talk about the dangers of investing too heavily in just one asset class: real estate. For the sake of safety and diversification, do we need to take some money out of our houses and buy some stocks and bonds?

To begin with, the idea that you can take some money out of your home without selling it is just a trick. You own 100% of your home regardless of how much you owe on your mortgage. If your house drops in value, the loss is yours, and the bank will still want the same mortgage payments.

So, “using home equity to invest” is just a fancy way of saying that you are borrowing money to buy stocks and bonds. And “using home equity to travel” is just a fancy way of saying that you are borrowing money to go on vacation.

Somehow, it doesn’t sound like such a good idea when you phrase it differently. Don’t be fooled by marketing language designed to get you into debt. If you decide to borrow anyway, at least you’ve done it with your eyes open.

2 comments:

  1. I once saw it claimed that paying down your mortgage early was a bad idea based on asset allocation. Presumably, the idea was that putting extra money into your mortgage somehow increased your exposure to the real estate market. I pointed out the error, but I'm not sure anyone paid any attention.

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  2. Patrick: I took a look at your comment, and I agree that paying off a mortgage does not add more real estate to your portfolio. The only way it affects asset allocation is if you are choosing between paying down the mortgage and buying stocks with the money. Of course, the mortgage should be viewed as leverage.

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