First off, let’s talk about what home equity really is - and why so many home owners have no idea how to utilize their home equity.

Myth #1 in regards to home equity is perpetuated by Stupid Home Owners who say;

“I want to pay off my home loan early and build equity”

As a loan officer, I can’t tell you how many times clients actually freaked out when I suggest it’s detrimental to pay off their mortgage early.

As if for suggesting that simple fact, I immediately became a financial idiot in their mind and they completely shut down. Believe me it happens a lot.

In fact, it’s very common to believe that having home “equity” is something to be proud of, something of value, something to rely on.

The Truth About Home Equity

It has no value at all. None!

It’s a number on a piece of paper. You can’t use it unless you take some sort of action (typically at cost to you) such as refinancing, selling, etc.

The equity in your home (assuming you just let it set there) is doing nothing for you. If you do decide to use it you must qualify for it financially and pay a fee to access it.

To access your home equity you must pay a fee and interest to use it.

Hell, once you realize the inner workings of believing the myth that home equity means anything to you – you realize that it’s simply a number on paper that the bank will loan you, maybe.

Paying off your mortgage, to gain equity is pointless really.

There are good reasons to pay off a mortgage yet very few though, other than an old school mortgage note burning party.

The only time home equity will have real value, is if you access it and actually put it to work (i.e. invest it). Yet how many people take out home refinance loans or a home equity refinance and put it to work? Not many. They either consume the funds frivolously or use it to pay off high interest debt. Home equity consumption is consumption – putting the value to work by investing is investing not to be confused by one another.

Yes Folks, The Stupid Home Owner Still Exists - And It May Be You!

I was once consulting with a client who freaked out when I mentioned that she get an interest only loan and actually never attempt to pay off her mortgage by “building home equity” so to speak.

She was visibly shaken.

So I simply said, what will you do with that equity when you “build it” by paying off your mortgage early?

She didn’t have an answer. Hmmmm

Then I asked, what happens when your equity loses $50,000 in a market value decrease? What will you do about that loss?

Well, that seemed to be ok with her – heck the equity wasn’t “real” money after all was it!

What about the fact that you will absolutely lose your tax savings by paying off the home. Meaning, you WILL pay more in taxes after LOSING your home interest deduction.

Let’s see, a $50,000 loss due to home market value declines, paying more in taxes, having home equity that you can’t use unless you refinance or sell – you seem to be ok with.

Yet, if you had all of your equity being invested for you, earning an income, maximizing your tax savings/deductions and realizing that if the market does take a dip, you are actually way ahead of the game because you are USING your equity instead of losing it effortlessly – you say “THAT’S A BAD, HORRIBLE THING” – guess what???

YOU WOULD BE A STUPID HOME OWNER!

Interest Only - Oh My!

I won’t even mention here the idea that if you DO use an interest only loan and take the monthly savings and put that to work for you also (i.e. mutual fund, tax advantaged savings, etc.) imagine the added value there say over a 30 year period.

At the end of 30 years, you can write a check for the total mortgage with all the millions of dollars you saved over the years, then take the rest and retire very wealthy.

OR you can pay that mortgage off over 30 long years (building that equity), have no savings (but you wanted equity right), pay more in taxes than you need to and retire bagging groceries and collecting shopping carts at the local grocery.

Of course, it’s your choice. But if you think the later example is winning the mortgage war – I can’t help you anyway.

If you really want to learn about what I’m getting at here, there’s an excellent book I recommend in the mortgage resources section titled; “Missed Fortune 101.” Don’t get too caught up in the title because this is THE definitive book on how to manage the home equity refinance process and retire a wealthy snob.

OR you’re welcome to bag groceries in your retirement too – it’s your choice. I’ll be the snob that tells you to hurry up and bag my groceries old man/woman. Home equity refinancing has it’s advantages, you make the choice.

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