|
Home-Equity: A new perspective The purpose of this article is to evaluate home equity as an asset by the same means as other investments (stocks, bonds, cd’s, etc.). With the tremendous appreciation of residential real estate in the past several years, perhaps now is an ideal time to review home equity as an asset. Investment advisors traditionally evaluate an investment based on the following important factors: · Liquidity – Can equity be converted into cash quickly if needed. · Safety – Is equity in a home safe? This series of articles will consider the investment properties of home equity. This issue will focus on Liquidity. Liquidity and Equity Life has many surprises: loss of a job, failure of a business, divorce, illness. Liquidity of one's assits is a major determinate of how one can handle surprises. Home equity can be converted into liquid cash in only two ways: - Sell the property: subject ot expensive closing costs (2-3%, commissions (6%), and market timing.
- Obtain loan against equity subject to qualification, market timing for mortgage rates, and (1-3%) closing costs.
Unfortunately, many home owners strapped for liquidity for whatever reason have been turned away by lenders in their time of need. Late payment and job loss are factors that can preclude one from accessing their equity. A home owner that has been making extra mortgage payments suddenly lost his job. With a balance of $150,000 and a value of $200,000, the owner was surprised that no finance options existed. After a recent remodel had drained his cash, the borrower was facing foreclosure in 90 days. Unfortunately, you have to prove to any lender you don’t need the money in order to qualify to access your equity. Think of it this way, money buried in you backyard is more liquid than home equity. A home owner that has been making extra mortgage payments suddenly lost his job. With a balance of $150,000 and a value of $200,000, the owner was surprised that no finance options existed. After a recent remodel had drained his cash, the borrower was facing foreclosure in 90 days. Unfortunately, you have to prove to any lender you don’t need the money in order to qualify to access your equity. Think of it this way, money buried in you backyard is more liquid than home equity. Real estate valuation is subject to the same lows of supply and demand of other investments. At any given time economic conditions can adversely impact real estate values. Please recall how cities such as Houston and Denver suffered traumatic valuation shock. While most owners were making their payments on time (perhaps even extra principal), due to sudden job loss, these owners faced liquidity shock and were foreclosed upon. Home owners that had the liquidity to ride out the hard times retained their homes and were not forced to sell their home in a deflated market. Conclusion
Many local home owners are currently house rich and cash poor. Perhaps with rates favorable and equity values at all time records, the timing maybe right to consider repositioning assets. New home buyers should consider putting less money down in this market and retaining liquidity. By: Michael Sarver, Epic Mortgage, Portland, OR |
