Friday, February 8, 2008

Unlocking the Value of Your Home

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.

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