Your Mortgage: My unpopular opinion of equity

Shawnee Mission Post Sponsor - September 25, 2018 10:00 am

Mike Miles

By Mike Miles

Hardly anyone agrees with me and my opinion of equity. Even my amazing wife shakes her head at me when I try to convince her that I’m right … about this topic specifically … not generally speaking. Actually, she does shake her head a lot, but that’s because she’s right way more often than I am. Back to my point … it won’t hurt my feelings if any readers disagree with my opinion. I think that people put too much emphasis on equity in homes.

I agree that having equity is important. Knowing that you have some sort of positive position in your real estate investment is significant. It’s part of a net worth calculation. It can create flexibility and peace of mind. However, at what sacrifice does it make sense to aggressively pursue gaining equity in a home?

Let me explain my side. Equity exists on paper until it’s time to sell the home or borrow against it, right? To access the equity, which exists on paper, you either must move or pay money to get it. So, when I see people stressing out about equity, I encourage them to think of a couple things:

  1. Do you want to move from your home in the next one to two years or do you want to improve it and possibly stay for longer?
  2. Do you want to borrow from equity to pay for renovations?
  3. Do you want to pull money from liquid accounts (checking, savings, retirement) to pay for renovations?
  4. Would you (homeowner) agree that a home is only worth what someone is willing to pay for it?

For those who believe they are going to move in the short-term, I can slightly agree with the opinion it’s important to build equity by overpaying a mortgage payment. I also might counter with the idea of depositing those excess funds (used to overpay the mortgage) into an investment that can outgain the rate of interest you are paying on the mortgage note. The idea here is that a home’s value one or two years in the future isn’t known. By the time it is known, the amount of it is equal to whatever a buyer is willing to pay for it. That amount may or may not be satisfactory to you. Conversely, if you took the extra money each month and paid into an asset account … possibly one that could outpace the 4 to 5 percent mortgage note … the value of that asset account has a defined value.

What about those that want to do renovations and have the cash to pay for it? I believe people should finance as much as they can, even if it means a significant amount of equity is used up in the process. I’ll explain more on this scenario in next week’s post.

Having an open mind regarding the idea of equity can be very healthy. It can open all sorts of housing possibilities that may otherwise be mentally blocked. Feel free to email me for more feedback on this topic.

This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.

Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268

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