>> How The Affluent Manage Home Equity

“It’s better to have access

to the equity or value of

your home and not need it,

than to need it and not be

able to get at it.”

How the Affluent Manage Home Equity

Copyright © 2006 by Strategic Equity LLC. All rights reserved.

They had the misconception that the

equity in their home had a rate of return

when, in fact, it was just a number on a

sheet of paper.

Then, a series of unexpected events

reduced their income to almost nothing

for nine months. They couldn’t borrow

money to keep their mortgage payments

current because without an income they

did not have the ability to repay. Within

six months they had sold two other

properties to bring their mortgage out

of delinquency. They soon realized that

in order to protect their $150,000 of equity

they would have to sell their home.

As Murphy’s Law would have it, the

previously strong real estate market

turned soft. Although they reduced

their asking price several times – from

$295,000 down to $195,000 – they could

not find a buyer. Sadly, they gave up the

home in foreclosure to the mortgage

lender. Sometimes sad stories only get

sadder. The two mortgages on the property

were in the amounts of $125,000 and

$25,000, respectively. The second mortgage

holder outbid the first one at the ensuing

auction, feeling that, much like the

original owners, it was in a good position.

Knowing that the house had been appraised

for $300,000, and the obligation owing

was only $150,000, it thought it could

turn around and sell the property to cover

the investment. It took nine long months

to sell, during which time the lender was

forced to pay the first mortgage and also

accrued an additional $30,000 of interest

and penalties. By the time the home finally

sold, less the $30,000 in accrued indebtedness,

guess who got stuck with the defi-

ciency balance of $30,000 on their credit

report? The original owners, of course!

This couple not only had a foreclosure

appear on their credit report for

seven years, the report also showed a

deficiency balance owing $30,000 on

a home they had lost nearly one year

earlier. In a time of financial setback they

lost one of their most valuable assets due to

a lack of liquidity. If they had separated their

$150,000 in home equity and repositioned

it into a safe side account, they would have

easily been able to make their mortgage payments

and prevented this series of events.

At this point in the story, Doug admits

the young couple was really he and his

wife, Sharee. Despite objections from his

editor, Doug insisted the story remain in

the book because he wanted his readers

to know he understands

importance of positioning assets in financial

instruments that maintain liquidity in

the event of an emergency. If Doug and

Sharee had access to their home’s equity,

they could have used it to weather the

financial storm until they could get back

on their feet. Doug learned from his own

experience the importance of maintaining

flexibility in order to ride out market lows

and take advantage of market highs. And,

most importantly, he learned never to allow

a significant amount of equity to accumulate

in his property.

Home equity is not the same as cash in

the bank; only cash in the bank is the same

as cash in the bank. Being house rich and

cash poor is a dangerous position to be in.

It is better to have access to the equity or

value of your home and not need it, than to

need it and not be able to get at it. Keeping

home equity safe is really a matter of

positioning yourself to act instead of react

to market conditions over which you have

no control.

i

The Seattle Times, in an article published

in March 2004, reported, “Remember that

housing prices can and do level off.

They sometimes decline – witness Southern

California just a little more than a decade

ago, when prices took a 20 percent to 30

percent corrective jolt downward.” Real

estate equity is no safer than any other investment

whose value is determined by an

external market over which we personally

have no control. In fact, due to the hidden

“risks of life,” real estate equity is not

nearly as safe as many other conservative

investments and assets. A home that is either

mortgaged to the hilt or owned totally

free and clear provides the greatest safety

for the homeowner.

Americans typically believe home equity

is a very safe investment. In fact, according

to a recent study, 67% of Americans have

more of their net worth in home equity than

in all other investments combined. However,

if 100 financial planners looked at a

client portfolio that was 67% weighted in

a single investment, 99 out of 100 of them

would immediately recommend the client