Equity in our homes is our prized possession we guard it with every fiber in our body and souls. 

• We think it is the key to financial freedom.
• When we have a lot of equity we feel good about ourselves.
• When we have a lot of equity we think we are sticking it to the bank because they aren't charging us as much interest as they could.
• We do everything in our power to pay down our mortgages as fast as possible so we can have more equity.
• If we had cash we'd pay cash for the house so we could have 100% equity.

I'm surprised we don't have a big "equity god" statue in our front yards just to show off to our neighbors that we have a bunch of equity.

Why is equity so important to us?

Here are some of my thoughts on the subject.

We have been taught by well meaning people in our lives that having equity in our homes is paramount to being financially successful.  Our parents, grandparents, teachers, friends, family, the media, financial pros, almost everybody has told us that having equity in your house is equal to financial freedom.  That when you get your house paid off you are financially free.

We want equity so our house is safer from the bank taking it back from us.  We want equity because that means our mortgage balance is lower so the amount we are paying the bank is lower or better yet with no mortgage I don't have to pay the bank anymore interest.  We think that if we have our house paid off then when we retire we won't have any financial worries I mean why should we there's no monthly house payment for us to make.

That's all good in theory the problem is reality doesn't always follow theory.  Let's look deeper into what equity is and who's it really is.

How can you get your equity out of your house?   

There are just two ways I know to get your equity out you can sell or you can refinance?   

Well if we sell then don't we lose use and control of the house? 

Where would we live if we sold the house? 

What other factors impact selling your house? How about:

• The market? 
• The economy? 
• Area employment?
• Affordability?
• Is monetary policy tight or loose?
• Is your house attractive to potential buyers?
• Do potential buyers have the financial ability to buy your house?
• Can they pay cash for the house? 
• Can they qualify for the loan to buy your house?

As you can see there are a lot of factors that impact whether or not you could sell your house to get your equity back out and many of them are dependent on the bank.  Can and will the bank loan money to potential buyers- if there are any?

What about refinancing?  This is what many people prefer since they get to maintain control over the house and they can have the money too?

How do you refinance? 

• You need to borrow money from the bank/mortgage company? 
• What dictates you getting that money from the bank?
• Your ability to qualify, right? 
• If you don't qualify can you get to the money? 

What type of events would dictate the NEED for your equity?

• Job loss,
• Disability,
• Major illness,
• Family emergency,
• Death of a spouse, need I go on? 

What do almost all of these have in common?  What do all of these share? 

A loss in income? 

If you suffered a loss in income do you think you will be able to qualify to get your equity?

Will you be able to QUALIFY to get your equity? 

If you have to qualify to get something is it really yours? 

Are you picking up what I am putting down? ;)

Even though the equity might be yours if it is not easily accessible, if you can't get to it when you really need it, since you really need the bank to get it whether you refinance or sell is it really yours?

Let's go a little deeper here.  Let's look back to why we want equity in our houses? 

Safety and financial freedom? 

How many folks do you think had free and clear houses in the south before Hurricane Katrina blew through? 

I haven't seen any final figures but there were thousands.  Thousands of folks that were financially free because they owned their homes free and clear right?

What do you think happened after Katrina? 

Were those people that had their homes safely paid off and were financially free able to pick up their homes and the money in them and do whatever they wanted to do?

If your home is destroyed then your insurance company would pay you your wealth right? 

What if you didn't have flood insurance?  Oh, homeowner insurance companies don't pay on flood damage?

Even if you did have flood insurance with a free and clear house they don't necessarily pay you the value of your house.  Just ask Senator Trent Lott from Mississippi.  He lost his free and clear house worth more than $700k. 

He had flood insurance, but it only paid $300,000 because that's the limit the national flood insurance program has.  He did have homeowner's insurance, but State Farm didn't think he had any wind damage. They ruled it as flood damage even though his roof was in the neighbor's yard.  The bottom line to him was State Farm wouldn't pay on his claim so he lost at least $400,000 of his equity- wait did I say his equity?  Was it really his if he can't get it when he needs it?

I have been hearing stories where it took more than a year for people to get insurance money from their houses- many of them free and clear.

What do you think would have happened with the flood insurance provider and the homeowner's insurance companies if these houses had little to no equity and big mortgages? Do you think the mortgage holders would have pulled out their high priced attorneys to get their money back?

Wait, that can't be right, since those folks had their homes free and clear and that is financial freedom they were all taken care of right?

You may be thinking I don't live in an area of the country that has hurricanes so this doesn't apply to me.  What about earthquakes are you anywhere near a fault that could give birth to an earthquake?  Did you know that unless you have an earthquake insurance rider your homeowner insurance doesn't cover it? 

Well I'm not near a fault so I'm not worried about an earthquake.  Well what about a terrorist attack?  Those aren't covered either.  The point here is having equity in your house no matter where you live is not a safe place to have it, certainly not safe enough for all the financial importance we put on it.

Another way of looking at this is IF having 100% equity in your home equals financial freedom then why are so many retirees having to tap their equity with expensive reverse mortgages just to survive?  Why would they need to do that- doesn't a free and clear house equal financial freedom? 

Oh, wait many of these folks sacrificed saving for retirement to pay off their house early and never got around to saving for retirement because their pensions and social security would take care of them, right?   Except pension benefits have been getting hammered, social security is only designed for maybe 1/3 of retirement, health care costs are going through the roof and the recent run up in home values has retirees on fixed incomes unable to afford their new much higher property taxes.

The Bottom Line is that even though the equity in your house technically is yours, for all practical purposes it's the banks because they control almost every access to it. 

Until next time.

Kurt