Would You Ever Put Your Money in a Bank NOT Insured by the FDIC

A bit of a strange question don't you think? What's this got to do with real estate or mortgages?  Read on and I think you will quickly see where I am coming from.

Seriously, would you ever put your hard earned money in a bank that wasn't protected by the government's form of insuring your money through the Federal Depositors Insurance Corporation?

Let me go out on a limb here and answer for you.  "NO!"  You wouldn't put your money in a bank if it didn't insure your money.  Why would you accept that low of a return for something risky, right?

Okay let me turn the tables a little here.  Do you have equity in your house?  Is it a substantial amount?  One recent survey showed that the average amount of equity in real estate today is about $135,000 so a majority of Americans have a substantial amount of equity in their house.  That number is probably pretty accurate because the last estimate of equity in homes across America is $12.3 Trillion.  We own a collective $22.1 Trillion of residential real estate and we owe $9.8 Trillion on it so America has a collective 44% loan to value.

A recent visit to the Kendall Todd website shows that 32% of our wealth is tied up in our houses in the form of equity and that 67% of American's have more wealth in their houses than in ALL their other investments combined.

Why do we have that much in equity in your house?  Do you realize that equity in your house is not guaranteed?  That's right the equity in your house has no guarantees. Is it insured?  Well, sort of.  If you have homeowner's insurance and the policy is kept current you are protected from things like fire damage, hail damage, and tornado damage.  How about flood damage, earthquake damage, or a terrorist attack?  Well then, NO!

Well if you have a mortgage loan and live in a flood zone you are required to have flood insurance. There is one caveat though, the maximum claim that can be paid is $300,000. So if your house is worth more than $300,000 and you lost your house to a flood, like Senator Trent Lott did in the aftermath of Hurricane Katrina, then you lose that equity.  It is gonzo!  Senator Lott estimated that his $400,000 loss was about one half of his nest egg!

How about earthquakes?  You are not covered by your homeowner's insurance policy unless you have an earthquake rider.  Why would you have an earthquake rider?  Well in Kansas City we live within a few hundred miles from a major fault, the New Madrid Fault in southeast Missouri, which is home to the strongest earthquake in the history of the United States.  In the early 1800's it registered an 8.0 on the Richter scale and made the Mississippi River flow north.  It would do significant damage to homes in St. Louis, Memphis, Chicago & Kansas City as well as other surrounding areas. 

Unfortunately, today terrorist attacks are a real threat and there is NO insurance coverage for it.  So how insured is your investment in your home?

This doesn't even take into account the safety of your equity from things that are even more likely to happen to you.  These likely happenings include suffering a disability, job loss, divorce or death in the family.  What would happen if your household suffered a significant loss in income?  How long could you make your payments? A majority of households couldn't make it two or three months with a cut in income. Could you get a loan to borrow the equity inside your house, I mean it's yours right? Hmm, getting a loan without a job or a significant cut in income, very doubtful?

So if you couldn't make your house payment for 3 months you run the risk of losing the house to foreclosure unless you can get it sold quick enough.  Do you know what the worst thing about foreclosure is?  Losing the house with YOUR money still inside it in the form of equity!

If you have to sell quickly what would you have to do?  You would price it to sell which equates to getting less for your house, right?  Plus you have to pay a real estate commission. That sounds to me like you are losing money, doesn't it?

So let us review keeping your money tied up in equity in your house.  It is not fully insured thanks to the inherent risks in life, floods, earthquakes, terrorist attacks, disability, job loss, divorce and death to name a few.  That doesn't sound real safe to me, does it to you? 

So basically the Average American has $135,000 of their wealth, (remember a full 32% of their overall wealth and for 67% of Americans they have more wealth in their home equity than all their other investments combined) in an account that is not fully insured, not guaranteed, and not earning you a rate of return. 

That tells me that the answer to the question "Would you ever put your money in a bank that was not insured by the FDIC?" Is actually a resounding "YES!" It shouldn't be, but if American's have $12.3 Trillion in equity then that answer to our question is "YES".

That can be changed that if you will raise your Financial IQ by learning how money works and finding out that a mortgage is not a debt but a tax deductible financial tool.  You should also learn the five things a properly structured mortgage will do for you:

1. It allows you to be able to invest more money into your retirement accounts and college savings plans.
2. It protects your money in case of life happening like job loss, disability, divorce or death of a spouse.
3. It permits you almost immediate access to your money in case of emergency or if an opportunity were to arise.
4. It reduces the Federal Income Tax you pay FOREVER!
5. Best of all it eliminates financial stress for you and your family.

Well what do you think?  How much $$$$$ do you have in that uninsured account?

Hey Realtors, do you think what you do takes on a bigger more important role in your client's lives?

Until next time,

Kurt