Helpful Articles

 

  Should You Take Equity From Your Home?

Do not keep all your equity in your home; you should separate your equity from your home.

You may not be able to tap into your equity if something happens to your home.  For example: 

In cases where houses were damaged from fire, mudslides, and over saturation: There were people who put all of their equity into their homes in order to have their house free and clear.  However, after this event, these people could not tap into their equity.  Although these people will be able to collect insurance money, they will not receive their reimbursements immediately.  If they had separated some of their equity from their homes, the victims could have temporarily lived on that equity.

You will not be able to access the equity in your house if you get into financial problems or into a no job situation, because you will not qualify for a loan.  As long as you have a good source of income, it is worth it to take the equity out of your house.

The price of your house will go up or down regardless of the amount of equity you have in it.  You should calculate what your returns can be on the money you take out of your property.  If your interest rate is 6% and you are in the 32% tax bracket, the cost of the money you take out is only 4% because it is tax deductible.  If you can make significantly more than the 4%, then it is worth it to take out the equity in your house for personal or business use.

If you invest conservatively in investments that yield around 4%, it is not worth it to take out a large amount of equity from your house.  Only take the amount that you will need to have liquid assets in case of emergencies.  You need to look at the net rate of return that you can make on your money.  Check to see whether it is worth it to borrow the money.  How much can your business grow by using this money?  Calculate your net rate of return on the money and compare it.

If the value of your house goes down and you took some of the equity out, you can ride the down trend, keep the payment, and use the equity and wait until it rises in value.

You should take equity out of your house while you have minimum debt.  If you fall on hard times, then it will be hard to obtain a loan.  The equity in your house is not liquid.  You can access liquid assets any time, but you cannot always access the equity in your house.

You should work similar to banks and businesses that receive money from clients at a low interest rate and lend it at a higher interest rate. It is similar to an arbitrage, where you borrow at a lower percent and lend it or invest it at a higher yielding percent.  If, during your arbitrage, you make more money than the money you took out of your house, you can always pay off your loan with the profit that you made on your money.  It will be a much faster way to pay off your house than not growing your business or investing rather than paying off your house.

 

Summary:

  • Taking money out of your house and putting it in liquid assets is safer than keeping it all in your house.
  • The money on a loan is tax deductible.
  • Compare and examine what your net rate of return will be.
  • If you can get a better return on your money, take the opportunity when you have it.
 
 
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