The equity in one's home is probably one of the most
misunderstood assets we all have. Yet when I sit down with
a middle income family it is almost always their largest
asset by far. A close second is usually their retirement
fund from their current or past employer but their largest
asset is almost always their equity in their home.
While this is true for most middle income families is this
really a good idea? After all if it is your largest asset
shouldn't you at least understand how it works?
For example what is the rate of return on your home equity?
It never ceases to amaze me that families come into my
office and they know exactly what the rate of return is on
the CD they own down at the local bank that's worth maybe
$5,000 yet they have no idea what to say when I ask them
the rate of return on the $20,000 or more that is sitting
in their home. Do you know what the rate of return is on
your home equity?
Well to fully understand home equity consider this
question. If you build up equity in your home is it going
to help your home appreciate (or go up) in value? In fact,
isn't your home going to go up in value the same amount
whether you have equity in it or not?
If you're not sure the answer is yes. Think about it, if
you own a home that is paid off it is not going to rise in
value any faster than if you own that home fully mortgaged
right? The property appreciates not based on how much money
you have invested in it but on how desirable a home in that
neighborhood is.
So if Equity in your home isn't helping it to appreciate in
value then what is your equity actually doing? The answer
is nothing! That's right the rate of return on equity in
your home is always zero.
Now from a business perspective or an investment
perspective does it really make sense to keep your largest
asset sitting idle earning a zero percent return? If you
said absolutely not than I would have to agree with you.
But, you may be saying to yourself what about the cost of
that money?
The problem is most people are under the impression that in
order to access the money already in their home they will
have to pay so much in interest that it just isn't worth
it. After all if you have to pay 6% or more to borrow that
money out from your home wouldn't you need to make 9% or
better on anything you might invest in just to make a
profit? And if you invest your home equity to make 9%
doesn't that mean you have to take significant risks with
that money just to get ahead?
What if I told you that this is not the way it works at
all? And that in fact you could borrow out that idle money
at 6% cost and invest it conservatively at 6% returns and
still make a hefty profit over time. I know this seems
impossible but if I could prove it to you would you be
interested to learn more? Well check this out... Let's say
that you have $10,000 in home equity and you borrow it out
at a cost of 6% per year as stated above. How much would
that cost you over 30 years? Let's do the math. $10,000 x
6%= $600.00 per year. So over a 30 year time frame it cost
you 30Years x $600= $18,000. Now most people stop right
here and say, see I told you it would cost too much money,
I am better off leaving my money in my house. Who would
want to pay $18,000 just to borrow $10,000? Well isn't that
just one side of the equation? Let's now take that $10,000
and invest it at a conservative 6% rate of return over the
same 30 years. $10,000 invested at 6% over 30 years grows
to $57,434! So the question is would you be willing to pay
an additional $18,000 in interest to end up with an
additional $57,434 in assets?
I bet you didn't think you could borrow money at 6% and
only earn 6% and still make money did you? The reason this
works is not magic its just mathematics. The money you
borrowed you paid simple interest on and the money you
invested earned compound interest. That is why you come out
so far ahead.
Now imagine you could write off the interest on that loan
as a tax deduction. (And in most cases you can) How much
did the loan actually cost you if you could write it off?
Even less right? But even if you can not write it off it
still works out pretty good for most folks. Also you might
want to keep this in mind. What if you could earn more than
a meager 6% on your money? How much better off could you be?
The point is the above example mathematically proves that
there are much better things you could do with your money
than just leave it sitting idle in your home. And more
importantly the only thing we have discussed so far is the
mathematics of investing your home equity but in reality
there are many other issues to consider. Such as, is your
home equity really safe or could it lose value over night?
Can you access your home equity when you really need it?
And so on.
If you have equity trapped in the bricks and mortar of your
home perhaps you should reconsider how you invest the
largest asset you have. Can you really afford to let your
money sit idle or should ALL of your money be working for
you? My advice is to talk to a trained professional about
how to use all of your assets (even your idle ones) to your
best advantage.
----------------------------------------------------
Antonio Filippone is a respected speaker on a wide range of
subjects. He has been published in the official journal of
the IARFC as well as interviewed on the Radio about his out
side the box financial strategies.Readers who are
interested in gaining more information on how to live debt
free and truly wealthy can request a complimentary copy of
Mr. Filippone's booklet by visiting his website at
http://www.tonyfilippone.com
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