1. Do nothing -The first option is to do nothing. This path of least resistance is also probably the least risky. It involves no change while providing you with additional equity, as long as your home continues to increase in market value and you continue to pay down the principal of your mortgage. People choose this option by default because they believe in the “forced savings” concept--that your net worth increases without your having to think about it, and at the end of the day, you will have a benefit that you did not really anticipate. The problem is values are not increasing as dramatically as in the past. A more aggressive approach As a preface to the following options, let me offer two philosophies. First, I am opposed to the use of equity in your home to purchase cars, boats, etc. And while the “do nothing” option is good for some people, for others, it is preferable to access and manage the equity in one’s home in a more aggressive way, thereby conserving and maximizing liquidity, safety, rate of return, and tax deductions.Second, consider this thought as you evaluate the best use of your home’s equity: Houses are meant to house families, not cash!
2. Consolidation of debt- A second option is to use the equity in your home to consolidate non-preferred debt (this is debt that has no tax benefit attached to it). That involves converting non-preferred debt to preferred debt (this is debt that has some tax benefit attached to it, e.g., tax deductible interest or home mortgage interest). Please do not consider this a general statement advocating that homeowners should borrow on the additional equity, pay off credit cards and other consumer debt, only to accumulate more consumer debt. What we advocate is responsible equity management. And many times, the first step to achieving financial freedom is to reposition and restructure your existing debt.
3. Invest your equity -A third option is to reposition the equity to take advantage of investments. This does not mean to throw caution to the wind, but there are many ways to use the same approach bank uses, a system that simply says, if you borrow at one rate, invest at a rate that is equal to or higher than your net cost of borrowing. This can be accomplished in a very safe environment using investment vehicles such as tax-free municipal bonds, investment grade life insurance contracts and many others. Adding real estate investments to your portfolio can be another way that you can benefit tremendously from this equity repositioning.
A final thought for consideration is that many people believe that the more equity they have in their home, the safer it is. As a result, they pour a substantial amount of money to paying off their mortgage as early as possible. In reality the two best ways to ensure security in your home are to either have the home completely paid off or have it mortgaged to the hilt. Anywhere in between leaves you quite vulnerable should the unexpected occur. The bank is much more likely to foreclose on a property that has a lot of equity than on one with a large mortgage on it. Besides, if you have a large mortgage on your home with the equity invested to an accumulated balance equal to or greater than the balance on your outstanding mortgage, isn’t the mortgage effectively paid off anyway? You have the money in a side account. The big difference is that you (not the bank) control the cash, allowing you to maintain the tax benefit for the life of the mortgage. As you can see, there are many options available as you evaluate the growing equity in your home. Because great care needs to be employed when you consider using a mortgage as a financial planning tool, it is critical that you involve the collaborative efforts of a mortgage professional along with a financial planner, CPA and possibly an estate attorney before you implement any of these strategies. However if you do, you can experience a dramatic increase in your personal wealth over time.