A real estate coach once said to me, “The real estate market can go up and down, but stocks and bonds can disappear. The land is always there, that’s why they call it real.”
Residential real estate is owned by millions of average Americans. For many, it is their biggest investment. Everyone wants to know that the value of their home appreciates and that they have the lowest interest rate possible. Values have increased steadily for the last 60 months. Your mortgage is a tool that allows you to borrow at today’s price against tomorrow’s value.
Rates have been historically low since the Great Recession, that’s good news. 39% of all home loans are refinanced. The bad news is that over half of them are pulling equity out of their homes, cashing out, to buy toys. Cars, vacations, motorcycles, boats, snowmobiles, pools, expensive furniture all have a low return on investment. Anything with a motor depreciates the minute it is off the lot.
Common sense is drowned out by a flood of marketing claiming, “Because you deserve it.” Euphoria washes over us when we buy anything from hair color to an expensive car that makes us feel younger, sexier, more like the posts on FB and Instagram. We are fooled by celebrities dripping with bling driving wow cars, wearing $15K ostrich jackets or toting a $40K Rose alligator Birkin bag. What they don’t say is that celebrities get paid to display a brand. You and I don’t. No one has knocked on my door offering me a contract to wear a Lululemon Energy Bra ($62) with LULULEMON 20Y Collection emblazoned across the front of it while I’m showing houses. That would be uplifting. The choice is really between swimming in debt, or backstroking to the shores of financial stability.
There are smart ways to use the equity in a home, and not so smart. All refinancing costs something. It may not be out of pocket, but attaches to the back of your loan that reduces equity increases your monthly payment. A refinance should drop a payment by lowering your current rate, a cash-out refi will raise it. That’s financing your feel good bling over 30 years.
If you hear ads of zero fees refinance loans, that falls under the ‘too good to be true’ story. “It’s the biggest no brainer in the history of mankind.” No, it isn’t. So what is a smart strategy to use equity? Think long term. Did you know that Amazon doesn’t pay dividends to stockholders? They reinvest it in growth. A year ago that stock was $984 @share, and recently broke $1905 @ share. We can use that same strategy.
A smart strategy is reinvesting in your home or an investment property. Resist the bling, go for the gold. Your investment portfolio doesn’t care if you deserve a quick pick me up.
A smart investment would be remodeling a kitchen, bathroom, finishing the basement, a new roof, windows, or upgrades that add value. A trendy kitchen, a pool, tons of granite, ever-evolving smart tech doesn’t add long term value. I’ve negotiated pennies on the dollar with a seller whose basement looked like NASA. The two towers that controlled that very smart house were 6 years old and totally obsolete.
Using an equity loan for a down payment for an investment property is another strategy. If you are a fixer-upper, think about a 203K loan which rolls repair costs into your mortgage. What you really want is a return on your investment, added value. You will want to leave equity in your home while increasing its value for the day you decide to move. Call me, we'll talk it over and then you can make a smart decision.