As a Mortgage Planner one of the most difficult concepts to try to explain to a client that is new to the equity management approach is the fact that equity offers no rate of return. Some home owners that have 20 to 50% equity built up in there home seem to think it is a safe way to save there money. In reality having a large amount of equity in your home is not always the safest way to save nor does it offer you a rate of return on your investment. Your property value is going to potentially increase each year regardless of the amount of equity you have in the home.
I have had clients that had 50K to 100k or more in equity in there home but could not access the money do to credit scores or employment situations. There are many situations that can arise that may cause a person to need access to there home equity, whether it is a business opportunity or for an emergency. In this case a client must first qualify for the loan in order to access the funds. So the first problem is equity is not liquid. The second issue is if you live in an area were your home values are decreasing then you are losing money that you have invested (with no return) in your home.
A recent report that was issued by the Chicago's Federal Reserve Bank has determined that by accelerating mortgage payments instead of investing money in tax deferred accounts more than one in three Americans are making the wrong choice. Mortgage overpayments, the feds report says, is a mis-allocation of funds that cost people 1.5 billion a year. The report also says that by putting the excess moneys in some kind of tax deferred fund, a consumer could reap the benefit of a median gain between 11 and 17 cents per dollar.
To read the full report, go to www.mtgplanning.com/taxes.html
The bottom line is you need to consult with a CPA, Financial Planner and a Mortgage Planner to determine what is best way to manage your home equity. Home equity needs to be managed just like any other asset to assure the best possible financial out come.
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