June 20th, 2008
"You got to know when to hold em, know when to fold em,
Know when to walk away and know when to run."
The Gambler, Kenny Rogers
Equity harveting is the practice of acquiring the highest possible mortgage on your personal home so you can "invest" the money derived from the equity that is extracted in another appreciating asset.
Don't do it.
It's true that there is NO return on equity. If you were counting on appreciation in 2008 and had to sell a property that was appraised for $500,000 in 2006 - thinking you would see an increase - you were probably surprised to learn that the property is now worth $450,000 - or less.
If you had a $300,000 mortgage in 2006 and had "harvested" the $200,000 in "non-working equity" to buy some other asset, yo would now be facing a serios shortfall. Worse yet, if the asset you bought relied on a stock index for its growth potential, you may be looking at less than inflation growth in that asset also.
Tax benefits? Maybe, but not assured. The IRS doesn't allow you to deduct the interest on equity lines over $100,000 and some investments disqualify deductions.
Now, we can make the situation worse. Most equity lines have variable rates and the lender has a great deal of leverage in raising and lowering the rate. You could have a loan rate that far exceeds the growth rate of the "investment;" a gamble based on a gamble and neither one paid off.
Equity harvesting is presented as a safe way to increase retirment income. It isn't all that safe and the increase is based on aggressive assumptions that are not always realistic.
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www.TheMoneyForLifeBook.com
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