by: Jeff Blovits
Don't ever, ever lose your job!
That's right, it's not your credit score or your assets or your equity or even Location, Location, Location that matter the most, it is whether or not you have an income stream capable of supporting your mortgage. Most people think of their home as the safest of investments that they have. It can be but only if you manage it correctly. If you have equity in your home, you are subject to the risk of loss of that equity at any time you can no longer afford to make your payments.
It doesn't matter how many years you have paid perfectly, if you for some reason can't, the bank will not let you slide for a few months to be nice. As a matter of fact, the more equity you have the more attractive it is to them to foreclose on you. That to me is the exact opposite of a safe investment!
I counsel my clients to understand that the most important thing they want to maintain is liquidity. They want to have the access to enough cash or near cash reserves that they are in charge or their financial choices.
This may not seem like a revolutionary idea but I would argue it is something that a great many people do very poorly. My clients are above average as far as wealth in their socio-economic groups. They tend to have more wealth per average income or job position than their peers. And most if not all of them have less than 5% equity in their homes!
There are many factors that contribute to wealth and putting your home equity to work isn't the magic criterion that assures you will be wealthy. But consider why these people are positioned this way and maybe the connection will become clear. In addition to liquidity, other benefits include increased safety, rate of return, tax savings, elimination of non preferred debt and establishing an emergency side or reserve fund.
How does all of this relate to income? Consider that if you lose your income you lose the ability to get access to the equity in your home. And guess when most people need access to that money the most? You guessed it, when something unexpectedly affects their income stream, like a job loss. Lenders will make loans to someone with bad credit, with no assets or reserves and with limited time in a certain field of work but if you don't have the ability to pay them back when you lose your job, they generally don't want to lend you money!
I would be willing to wager that most of you have either been affected by corporate restructuring or know someone who has. There are also a substantial number of people who lose jobs either because they or someone in their family becomes ill or are injured. In those situations would you be better off with $50,000 in an emergency fund to help you get back on your feet, pay doctor or home care bills, and allow you a cushion to find a good job instead of the first one you could find or have $50,000 in equity in your house that you couldn't access?
Now to finish up on the wealth equation as it relates to home equity. One thing that most people don't understand is their home equity is earning them a 0% rate of return. There are 2 components to your home value: what it cost to purchase it (basis) and appreciation. In 5 years your house will be worth the same whether you have a mortgage or don't. Any money you choose to put into the house is simply a return of your investment.
If you are willing to rethink the wealth equation and put your home to work for you it can be a great source for turbo charging your wealth. If you coordinate that with an integrated financial plan involving your planner, accountant and insurance agent then the results can truly be outstanding!
Jeff Blovits
Prospera Mortgage Group
Westerville, OH
p. 614.898.5656