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Risks of having equity in your home?

Posted by behaviorkelton (My Page) on
Mon, Feb 25, 08 at 9:16

Revealing, once again, my level of unsophistication in finance...

I was reading through some financial advice, and someone mentioned that having equity in your home has one kind of disadvantage that hadn't occurred to me.

If something disastrous happens to you financially, and the bank "gets" your house, you lose the house and all of your equity. Is this so?

Thus, it seems to me that once you "commit" to prepaying on your mortgage, you should truly follow through with it to the very last mortgage payment.

I paid off a huge portion of my mortgage, and realize that all of that equity goes 'poof!' if something crazy happens.

So, given this, it seems that I have two options:
1. Pay off the rest of the mortgage, so the bank can't score a touchdown at my expense!
2. Refinance my house for the full amount: Eeeww!

This is probably my fourth distinct "prepay the mortgage?" type of thread.

Even though I'm in my early 40's, I have somehow managed to acquire a depression-era mentality of sorts; always expecting and preparing for emergencies... so debt of any sort falls under the category of "bad", and now, putting the bank in a position to swipe my prepayments is no good either!


Follow-Up Postings:

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RE: Risks of having equity in your home?

Heaven forbid anything disastrous happens to you, but if it does, that is why one should have 6 months of living expenses readily accessible.

If something disastrous happens to you financially, and the bank "gets" your house, you lose the house and all of your equity. Is this so?
I think that could happen if you let it. I have seen those who lost their homes dues to a loss of part of their income, or due to payments rising due to interest rates rising. These were folks who left themselves open to losing their home. They did not have 6 months of reserve cash. They did not adjust spending to cover the lower wages or higher payments. They did not seek a second job to cover the extra amount needed to keep up. They just wished and hoped 'things' would work out. They wished and hoped until the day they were evicted. They just were not seeing things realistically as you do.

I can see where one could loose their home a lot more easily if they were not financially savvy and conservative as you are.

Sue


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RE: Risks of having equity in your home?

I think that in general, if the bank forecloses on your mortgage and repossesses your house, and then sells the house (which it presumably will), then any money left over after repaying the mortgage and associated expenses is yours.


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RE: Risks of having equity in your home?

i agree from what i understand the bank only takes what is left owing and any costs they incur and the rest goes to you. and as for 6 months of living expenses saved up im sorry but in this day and age thats a hard one to see hapenning. my hubby and i would be good for a couple of months but lets be realistic i dont have 35K sitting in the bank for emergencies. equity is a great thing to have in your home, and you to be congradulated becuase most poeple in this day and age are mortgaged up their eyeballs.


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RE: Risks of having equity in your home?

I think that in general, if the bank forecloses on your mortgage and repossesses your house, and then sells the house (which it presumably will), then any money left over after repaying the mortgage and associated expenses is yours.
I'd guess that the bank would only be interested in recouping what was owed to 'them' and have no concern for getting any more for the buyer who defaulted on their mortgage. Years ago, I bought 34 acres of farm ground the bank had for sale. The farmer who had been buying it, defaulted on his loan. The bank was only interested in covering what was owed them. I asked what it would take to buy it, was given a hint, made an offer, and got it. A neighbor had also made an offer, but it evidently did not cover what they 'needed' to get. What a bargain! Needless to say, I was thrilled with my purchase and have been enjoying it ever since.

Sue


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RE: Risks of having equity in your home?

That's true - you would get the money left over after the sale -- after they hit you for attorney's fees, expenses of sale, etc., so they will do a nice job of whittling it down to where you get little and they get a lot. Normally, if someone has severe financial problems that make it impossible to pay a mortgage, but has considerably equity in the home, the homeowner would normally sell the home on his or her own. That would be far preferable to going through a foreclosure, as it would allow the homeowner to entertain offers, get the best price, and avoid payment of legal fees.

Bankruptcy could be another way to preserve one's home in the event of severe financial problems.

One other potential consideration if that if you own your home free and clear, or have a lot of equity in it, it can become a more attractive target to be taken away from you if you were to get sued.


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RE: Risks of having equity in your home?

Years ago when my marriage fell apart my wife thought that she was entitled to the entire house which was fully paid for. In practice she found out that was not the case. What would happen if your partner attempted that would depend on the law in your state. You may think that you are not married but might find out that the law would consider you to be in a common-law situation and thus married in the eyes of the law.


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RE: Risks of having equity in your home?

What if you buy mortgage insurance?


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RE: Risks of having equity in your home?

As was previously stated, you receive the proceeds of a foreclosure sale (sales price minus mortgage balance minus selling expenses).

Don't worry about being foreclosed if you are comfortable with the size of your current monthly payment. However, if you are one of the people who was overly optimistic regarding their ability to make the monthly payment, you may have a problem.

IMO, nearly everyone should strive to pay off their mortgage before they retire.


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RE: Risks of having equity in your home?

They ask a question every day on the kitchen table forum and when they asked how many places you'd lived during your lifetime, I was a bit surprised to find that I'd lived in about 22 during my currently 79 years, and I have never owned a home.

Owning a home offers a substantial advantage in Canada, for, though we can't deduct the interest on the mortgage on an owner-occupied home, when we sell it, there is no capital gain tax assessed against the proceeds of sale.

Years ago when employment was more stable, I might not have felt so, but in these days of uncertain employment, I would absolutely not want to be in a position where I had little reserves if I had an obligation to make regular payments on a mortgage.

While I have recommended that people try to make extra payments on their mortgage when possible, especially in the early years, for at that time when the debt is high, the amount of the equal level of monthly payments that goes to pay the interest on that large debt for a year is large, with very little paid down on the principal, so often if people can make an extra month's payment, it will reduce the principal left owing by as much or more than was achieved by all of the other monthly payments in a year.

However, I wanted my clients to have some cushion available in case of substantial term disability, unemployemnt or whatever other reason, enough money quickly available that they could live for 3 - 6 months, or even a year, with no income.

Sometimes lenders might be quite hard-nosed about dealing with difficulties that a mortgagee faced and, if payments were not made on time, be quick to foreclose.

Sometimes, and some lenders, are willing to negotiate some relief in case of temporary difficulties.

It seems to me unfortunate that many greedy lenders set up the current situation in the U.S., where many mortgagees agreed to start with an artificially low initial interest rate payable at the time, with the rest of the actual current rate tacked on to the principal. When the time has come for renegotiation and the lender begins charging the real rate currently, many mortgagees have walked away from their mortgages because they couldn't afford the new payment levels.

Which means that many houses have been put into foreclosure and are offered for sale. With so many houses available, prices drop, and some folks who wish to buy are becoming unwilling to enter the market at present, thinking that prices will be lower, later.

My daughter made an offer on a residential situation in a sunbelt state in the fall, and there was $5,000. difference, with neither willing to budge.

So she returned to this area. Not too many months later, she told me (several months ago) that there had been a re-evaluation of the location ... and the price was $20,000. lower.

In such a situation, it might be advantageous for the mortgagee to have little equity in the home, if they wanted to keep it, for if the lender felt that there'd be little possibility of selling for enough to get the amount owing plus the costs of sale out of it, they'd be less inclined to foreclose.

However ... it might not be such a good deal for the mortgagee to hang on, either, for it might take years for them to be able to recover any net equity for themselves.

Behavior kelton, I don't understand your statement of "agree to prepaying" on your mortage. When you made your contract, you agreed to make regular mortgage payments at specified times, either once in two weeks or once monthly, usually.

Have you committed to your lender that you will make extra payments? Usually such extra payments are made at the mortgagee's discretion, but s/he has not made a formal commitment to the lender to do so.

As someone has said, usually if you are unable to keep up your required mortgage payments, you know that for a time before the lender knows it.

Which gives you an option of trying to make a deferral deal with the lender, or to offer the house for sale, etc.

If the prices have gone down so that there is no hope of getting enough proceeds from sale, after all of the selling costs, to pay off the remainder of the mortgage, i.e., the so-called "owner" has lost all of his/her equity in the home and is in a real bind.

If the lender forecloses, usually a large number of (often inflated) costs are built up relative to the sale, if there is a possibility of gaining more when selling than is owed.

But the bank is not under much obligation to realize the best possible price, as they must pass any excess over what is owed to them over to the former owner.

Which leads many to say that if you know that you can't keep on paying, it's better to sell the home yourself than let it slide into foreclosure by the lender.

Also, if prices are lower in your area, would it be possible to negotiate a new mortgage for enough to pay off your current mortgage?

And what would you gain were you to do so? Would you be able to get a lower rate than the current one? Would you have to pay a penalty to cancel your current mortgage, if the interest rate is higher than rates that you could negotiate now?

Wouldn't you be back in the same boat, at risk of foreclosure should you be unable to make the payments? If you spread the payments over more years, in order to reduce the current payment levels, it means that you will be paying a great deal more interest in total.

Can you explain the situation a bit more, please?

I hope that you are not facing such difficulties.

ole joyful


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RE: Risks of having equity in your home?

No, I'm not experiencing any difficulties... well... I did buy this house at the peak of the market!

It wasn't expensive to start with, so even a 15% loss is tolerable from my perspective. As usual, I am expecting the worst and have prepared myself for disaster! I'm in Knoxville, Tn and we didn't experience the real estate "boom!" of many areas, so it is expected that our declines will be less dramatic than many areas.

I said that "once you commit" to prepayments only in these sense that you make a commitment to yourself. I have a 15yr mortgage. I have owned the house for almost two years now. I have paid it down quite a bit and will be paid off in 4 yrs if I make the minimum payments.

At this point, my interest on this house is only $175 a month and dropping quickly with each payment.

Again, I realize that paying off the house is emotional. To me, it "feels" sorta like the feeling that other guys feel when they buy a Harley: Rebellious freedom! It's kinda like being unleashed or free from the shackles (of debt) that 99% of us seem to suffer. So you get the free-rebel vibe from it! (one of my favorite "vibes" of all)


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RE: Risks of having equity in your home?

Here in the US banks can't foreclose if you are keeping current on your payments, regardless of whether your loan is underwater or not. They don't make money on foreclosures, so it isn't in their interest (nor is it legal) for them to do so.

The point about being sued is unfortunately realistic these days. You might want to investigate an umbrella liability policy. They're extremely inexpensive, and might be worth your piece of mind. When we paid off our mortgage - we're not as thrifty as you, alas; my MIL gave us the money - I arranged for an umbrella liability policy. I'd been meaning to do it for years, kept putting it off, and finally gave myself the "push" to do it. Since we periodically have workmen doing maintenance stuff around the home, plus there's a lot of kids and teens in the neighborhood, we felt it was worth the extra $200/yr to get $2M in additional liability coverage.

Why so much? Because although our house isn't worth more than $500K, our total net worth is easily in the $2M+ range. The basic homeowners insurance policy doesn't come close to what juries award in damages these days, as everyone knows.


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RE: Risks of having equity in your home?

Hi BehaviorKelton,

WOW... what a rich thread... so many places to add to here!!!

I was reading through some financial advice, and someone mentioned that having equity in your home has one kind of disadvantage that hadn't occurred to me.

You sure that wasn't you reading one of MY rantings & ravings? I feel like I'm a broken record in this regard... so many people carry so much risk, all the while thinking they are being "conservative and responsible" when they're falling into exactly the opposite trap.

If something disastrous happens to you financially, and the bank "gets" your house, you lose the house and all of your equity. Is this so?

No, if you default and the bank forecloses, they must ofer it at public auction for the best open bid price, and whatever that price is above what you owe them the court trustee holds for a period to ensure there are no other legal claimants... and then you get the balance.

If there are no open bidders offering at least what the bank is owed (which means there is not only zero equity to lose... you've already borrowed more equity than the home is worth,) then the bank usually bids to buy the home at the amount it is owed, allowing it to assume title free & clear. It then gets managed by the banks Real Estate Owned (REO) department which is responsible for cleaning, repairing, managing and maintaining the portfolio of houses until they can get re-sold to recapture whatever value is actually left in the home, so that the bank's cash depositors & investors (often your own retirement investments) don't suffer from the losses as much.

Thus, it seems to me that once you "commit" to prepaying on your mortgage, you should truly follow through with it to the very last mortgage payment.

If you "commit" to prepaying your mortgage, there is a "safe" way, and a "foolhearty" way.

SAFE = build a liquid side account seperate from the real estate entirely until such time it is large enough to pay of the entire untouched mortgage balance at the stroke of a check. This is the thoughtful, mature, responsible practice of "building a bridge over the minefield."

FOOLHEARTY = attempt to "tiptoe across the minefield without any armor" by paying much (or even all) of your safety cash into the illiquid, vulnerable real estate value (gambling against real estate fluctuations, and uninsurable disasters.)

I paid off a huge portion of my mortgage, and realize that all of that equity goes 'poof!' if something crazy happens.

Indeed... a scary "wake-up" realization, no?

So, given this, it seems that I have two options:
1. Pay off the rest of the mortgage, so the bank can't score a touchdown at my expense!

The bank gets nothing "at your expense" from any failure on your part. When you fail, the bank bleeds also.

2. Refinance my house for the full amount: Eeeww!

The financially safe thing to do is to seperate your equity (or at least most of it) from your real estate, and diversify it into safer "buckets" that are not vulnerable to the same risks as your home, and have much greater growth capabilities.

This is probably my fourth distinct "prepay the mortgage?" type of thread.

Yeah.... haven't I explained this all before?
(Again... even I feel like a skipping record in this regard... maybe it was at a different board?)

Even though I'm in my early 40's, I have somehow managed to acquire a depression-era mentality of sorts; always expecting and preparing for emergencies... so debt of any sort falls under the category of "bad", and now, putting the bank in a position to swipe my prepayments is no good either!

Being cautious & conservative is a GOOD THING!!!

Thinking that "all debt is bad" and "banks are out to get you" is a very small-minded and fear-laden, and is ultimately quite dangerous & hazardous to your security & potential financial independence.

Time to open the mind and REALLY see the risks you are taking on by over-concentrating your cash equity in a single real estate asset.

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Hi Sue,

Heaven forbid anything disastrous happens to you, but if it does, that is why one should have 6 months of living expenses readily accessible.

HALLELLUJIAH (or however that's spelled!) I'll add that we all need at least 6 months CASH AND EQUIVALENT reserves.... not merely cash-advances waiting from our HELOCs or Visa cards.

In several markets recently the "unthinkable" has happened (which I have been warning people about for years,) which is that undrawn HELOCs have been getting frozen, basically blocking the homeowners from accessing any further of their own home equity entirely. Now is NOT THE TIME to assume your family's home equity is safe if paid and held in the home itself.

Further, ALL CASH RESERVES ought to be held at a SEPERATE INSTITUTION (bank) from any debt or charge accounts we may have open, to prevent potential of "offsets" (freezing of accounts) if something goes wrong with the debt accounts.

PLAY DEFENSIVE!!! (You hear me BehaviorKelton? Use your paranoia to your intelligent ADVANTAGE!!!)

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Hi ky114,

That's true - you would get the money left over after the sale -- after they hit you for attorney's fees, expenses of sale, etc., so they will do a nice job of whittling it down to where you get little and they get a lot.

Newp... once again, the "banks are out to get you" fear is upside down.

"When borrowers fail, bankers bleed."

The AVERAGE cost to banks for EACH foreclosure is a bit over $40,000. That's not money they collect and keep, that's money they "get to pay out" to courts, and attorneys, and repair handymen, and Realtors, you name it.

Banks are HIGHLY incentivized to find the smoothest, least costly solution to avoid foreclosure whenever possible.

Whenever NOT POSSIBLE to avoid foreclosure, they foreclose on the homes that have THE MOST REMAINING EQUITY FIRST!

The more you have seperated your cash equity to places OTHER than your home, the safer your family's home is.

One other potential consideration if that if you own your home free and clear, or have a lot of equity in it, it can become a more attractive target to be taken away from you if you were to get sued.

Here you are absolutely correct! Lawyers hate working for nothing, and their kids get skinny if they never get paid... so if their targets don't necessarily have easily findable CASH, the attorneys can easily look at the title records at the county courthouse to see what liens are against the property, minus what the approximate value ought to actually be (which equals the remaining equity.)

If a litigating attorney sees that there "is no equity... no cheese down that tunnel" they will politely find reasons to avoid attacking you on behalf of whatever litigious nutcase decided you are their nemesis.

If a litigating attorney sees there IS entrapped equity, with no loans against it, THEN they know that if they win... even if you refuse to pay up on the court awards... they can place a "cloud" (a legally binding "I-O-U") on your real estate title... and be assured that you will be FORCED to repay them whenever you try to sell, or try to refinance.

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Hi Ian,

Years ago when my marriage fell apart my wife thought that she was entitled to the entire house which was fully paid for. In practice she found out that was not the case. What would happen if your partner attempted that would depend on the law in your state. You may think that you are not married but might find out that the law would consider you to be in a common-law situation and thus married in the eyes of the law.

THIS IS SO VALID OF AN ISSUE!!!

I frequently point out that FAMILY (exes, in-laws, and ex-in-laws) can often be FAR WORSE THAN HURRICANES!

COMPLETELY uninsurable... 99% of the victims NEVER saw it coming...

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Hi nycefarm,

What if you buy mortgage insurance?

There are two kinds;
PMI = protects the lenders against losing money (their money) if you default. Won't help you at all, except to qualify for that much of a mortgage,

Mortgage-protection life insurance = protects YOUR HEIRS against the loss of your income when you pass away. In some cases there may be a disability rider (additional coverage that pays if you are crippled,) but in general this is over-priced coverage that you can get in other ways more reasonably from group coverage, normal life insurance, etc.

To date there is no such product as "Equity Protection Insurance."
(Actually there is.... it is called "mortgage interest" and when you pay if and have all of your equity cash elsewhere, your value is protected.)

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Hi Deerslayer,

IMO, nearly everyone should strive to pay off their mortgage before they retire.

I agree... however, NOT A PENNY NOR A DAY EARLIER!

A mortgage is simultaneously "equity protection" and "retirement invetment accelerant," and frittering its power away little-by-little PRIOR to achieving your level of retirement (hopefully full financial independence) is desperately dangerous.

Accumulate safe money seperately, and NEVER cheat your mortgage power until it is FINALLY time to eliminate it in one check.

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BehaviorKelton,

I said that "once you commit" to prepayments only in these sense that you make a commitment to yourself. I have a 15yr mortgage. I have owned the house for almost two years now. I have paid it down quite a bit and will be paid off in 4 yrs if I make the minimum payments.

At that time will you be at the point where you can afford to lose your home equity, or the home itself, and still have enough passive income to survive (preferably to live comfortably,) and enough side-assets to acquire a new home?

If YES, then you are indeed on track!

If NO, then you are skating on extremely thin & dangerous ice.
Your net worth can be shattered literally almost overnight, and you may have no recourse, and no resources.

Again, I realize that paying off the house is emotional. To me, it "feels" sorta like the feeling that other guys feel when they buy a Harley: Rebellious freedom!

All things considered... you may actually be safer riding a Harley ;~)

It's kinda like being unleashed or free from the shackles (of debt) that 99% of us seem to suffer. So you get the free-rebel vibe from it! (one of my favorite "vibes" of all)

Wouldn't it feel even better to be TOTALLY free? Free of the vulnerability of loss of your net worth by concentrating all your eggs in a vulnerable basket?

Weigh the odds carefully in FULL light.

=====================================================

The critical lessons here;

Naked debt is a burden, is dangerous, and deterious.
Debt married to growth assets is LEVERAGE.
Managed Leverage accelerates your financial freedom.
Managed Leverage protects your financial security.

Equity Risks;
Softening of the asset class... drops in value,
Litigation. Suit-crazy nutballs.
Acts of God. Hurricanes, fires, blizzards etc... and the ensuing delays while insurance companies argue and counter-sue each other to determine which one is responsible to cut you a check... while you wait, and starve. If in doubt, check this out; http://www.consumeraffairs.com/news04/2005/katrina_lott.html
Personal tragedy; health issues, employment issues, family emergencies, etc.

Manageds Leverage is your only real protection against the very real risks, above.

Luck!
Dave Donhoff
Strategic Equity & Leverage Planner


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RE: Risks of having equity in your home?

Thanks Don,

Wouldn't investing in the market be just as vulnerable to a law suit?

I mean, if I am going to focus strictly on the kinds of stuff people can take from me, it seems that we are vulnerable from almost any angle. right?

Bank accounts, brokerage accounts are vulnerable if I'm not mistaken.

Retirement accounts are probably safe. not sure.

Perhaps I should buy old gold coins and keep them in a safe!

If having a paid for house is so risky, why would someone ever want to pay it off?

(I'm not being a smart Alec... just asking)

And Don, would you suggest I refinance the house to it's max? I few days ago, I could have achieved a 5.6% mortgage...but I think it jumped up just today.

I guess the question is: Is it any more risky to have a paid-off house as compared to just having the same amount of cash in a stock market fund? In fact, I would think that it would be easier and quicker for the lawyer to get your liquid assets.

To be honest, I thought that our primary residence was immune from being touched by litigation. Well, perhaps someone could sue and take your *profits" from a sale... I didn't know that they could take the principle.


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RE: Risks of having equity in your home?

Hi Kelton,

Thanks Don,

You're welcome, of course ;~)

Wouldn't investing in the market be just as vulnerable to a law suit?

No, litigating attorneys have to work much harder (on their own dime, or at the convincing of a potential client to prepay their fees for the purposes) to determine if you have anything at all to go after, BEFORE they launch their resources to actually build a case & go after you. Only real estate, its values, and the liens against it, are publically recorded for all to access for free.

FURTHER, there are litigation-sheltered ways to accumulate your equity outside of your real estate that make it very close to completely impossible for ANYBODY to crack the nut. Example; OJ Simpson shelters a very significant portion of his prior wealth in a special type of pension that the Goldmans (nor anyone else) can touch.

Not saying OJ deserves such protection... but if anyone DOES NOT deserve it (in my opinion,) it is him... yet the law protects his assets the same as anyone else.

His real estate, on the other hand... Gone, Baby, GONE!

I mean, if I am going to focus strictly on the kinds of stuff people can take from me, it seems that we are vulnerable from almost any angle. right?

Nope.

Bank accounts, brokerage accounts are vulnerable if I'm not mistaken.

Mistaken.. it all depends on the titling, and treatment within legal measures.

Retirement accounts are probably safe. not sure.

Some yes.... federally regulated pensions are far more soundly sheltered than state qualified accounts.
Life insurance accumulation accounts have a similar shelter profile to federally regulated pensions.
Either held in a properly structured trust are all but bulletproof.

Perhaps I should buy old gold coins and keep them in a safe!

Gold offers no guarantees against loss of principal... you're simply buying a volatile commodity.

If having a paid for house is so risky, why would someone ever want to pay it off?
(I'm not being a smart Alec... just asking)

A) It is VERY worthy of being paid off, AFTER the borrower is no longer at risk of loss (that is, when their LIFESTYLE can absorb the loss of a single paid-off home, or its value... and the funds used to pay it of aren't taken from passive investments that are at least sufficient to provide all lifestyle income required.)

B) Otherwise, most people that risk it on a dollar-by-dollar basis simply are unaware of the danger they set upon themselves (again, refer to the previous Trent Lott link. He is certainly no dummy... but even HE got "schooled" and quite publically as well.)

And Don, would you suggest I refinance the house to it's max? I few days ago, I could have achieved a 5.6% mortgage...but I think it jumped up just today.

There is a term that says "rates are relative."
When borrowing rates go down, safe rates of return also tend to go down.
Vice versa... when borrowing rates rise, safe rates of return tend to rise.

It matters little what either side is doing by itself...
What matters is the matching of returns & safety of equity on both sides.

I guess the question is: Is it any more risky to have a paid-off house as compared to just having the same amount of cash in a stock market fund? In fact, I would think that it would be easier and quicker for the lawyer to get your liquid assets.

Yes, the paid off house is far riskier.
No, the EASIEST payday for an attorney (if not the fastest) is to slap a lien on your property to satisfy an easy judgment from a lawsuit.

Even basic and simple money market accounts are additional steps to get at my litigating attorneys (though by themselves, not THAT much tougher... if you are going to be "conservative" there are much safer ways to protect your net worth in various litigation-sheltered accounts.)

To be honest, I thought that our primary residence was immune from being touched by litigation. Well, perhaps someone could sue and take your *profits" from a sale... I didn't know that they could take the principle.

??? What are "profits" versus "principal" in this case?

If you bought a home at $100,000... through $50,000 of your money into it.... and an attorney figured out there was $50,000 of "paydirt" on your home, that attorney (given a judgment and appropriate court permissions) can place a 'lien' against your home and you will have no choice but to pay that lien to do anything you want with your equity, whenever you decide to.

The courts, nor the attorney, care whether the naked equity is from market appreciation or mortgage paydown... it is available money, they can see it, and they wannit, and they gonna gittit!

I'm not saying you CAN'T keep your money this way....
Its just one of the most vulnerable places you can retain your personal net worth, is all.

You mentioned being a "depression style" mentality. You *DO* realize that most of the people who lost their homes to foreclosures in the depression lost them *AND* were left with no funds remaining, because most had been trying to pay back the bank as quickly as possible... right?

Don't do that ;~)

Cheers,
Dave Donhoff
Strategic Equity & Leverage Planner


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RE: Risks of having equity in your home?

BehaviorKelton,
If your house is your only asset that is having all your eggs in one basket.
Portfolio theory says that one should spread ones assets around so that a disaster doesnt wipe out everything. There has been a story in the local paper about a retired couple who built their dream home on a bluff overlooking the river. They had no other assets. It turned out that the land on which their house was built is slowly sliding into the river. They have been attempting to recover money from the district government with no success so far. They also had to abandon the house and move into an apartment in town.
There are other potential problems with having a house, which is fully paid for. If you fail to pay the property taxes the property can be confiscated. A mortgage lender will usually see to it that the taxes are paid up. You may think that would never happen to you, but as a behavior councilor you should know that people could become so incapacitated that they cannot manage their affairs.
There are other less obvious problems. Without having to make regular payments there is the temptation to tell your boss where to go and how to do it. I live in an area with many natives living on reserves. The natives live in houses from which they cannot be evicted but they cannot get loans against their homes. Many of them have no regular employment, no credit and poor living standards. They also find it difficult to move because they suddenly would have to pay for their housing.
Ian


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RE: Risks of having equity in your home?

Interesting.

Ok, so you do you suggest that most people would be best off keeping a mortgage with as little equity as possible? (and would you suggest that *I* go get this house refinanced?

So in keeping money "untouchable", what are some examples of these kinds of investments?
Would putting my parent's name (or someone else's name)on my accounts help? ... or are these "safe havens" going to require an attorney?

You say that you are repeating yourself, but this is all news to me!


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RE: Risks of having equity in your home?

Hi Kelton,

Ok, so you do you suggest that most people would be best off keeping a mortgage with as little equity as possible? (and would you suggest that *I* go get this house refinanced?

First of, equity is equity is equity... real estate is only one place to keep your equity. You can move your money from your left pocket to your right pocket, and you still have the same amount of money. Keep ALL of it in your baseball cap, and a strong wind might take it ALL away.

As for what I would "suggest"....
A) I *really* simply suggest making sure you are fully informed from which to make your decisions. Constantly be on the alert to avoid making uninformed or fear/greed/emotional-based decisions when you can avoid doing so.

B) Real estate is ONE of your "pockets" where you can keep your money. Be fully forewarned & fore-armed as to the real risks of doing so (financial risks,) and whether there are really any upsides (financial upsides) in doing it on an incremental basis.

C) After doing your BEST to fully inform yourself with solid financial knowledge... *THEN* do a "gut check" and go internal to make your emotional decisions.

Ultimately ALL decisions are emotional... this much I believe we can all agree to. I just hope for you that you start from your highest knowledge level and THEN filter down to the base emotional levels.

So in keeping money "untouchable", what are some examples of these kinds of investments?
Would putting my parent's name (or someone else's name)on my accounts help? ... or are these "safe havens" going to require an attorney?

Before being overly concerned about whether you'll need an attorney or not, keep pushing aside your emotional assumptions (as you are EXACTLY doing right now, as you keep "coming back to the well" for more info... fully in spite of self-accusing yourself of ignorance (which is not at all appropriate. Ignorant people have no concern for knowledge... you are far from ignorant!))

Ask yourself "how much of my personal net worth can I emotionally sustain a loss of if I keep it in my home, and the home either loses value, or is attacked by the "SLAP" risks Dave detailed out?"

Whatever that amount is that you can sleep at night with the awareness of risk of loss, leave THAT much equity entrapped in your home, and PLAN TO move the rest out with a cashout refinance.

DO NOT REFINANCE, however, until AFTER you become comfortable with your selection(s) of how and where you will employ that same amount of equity... *AND* until you have an ongoing plan in place to continue to BUILD your total equity, aside from your real estate, so that you CAN finally pay the entire mortgage off safely "with the stroke of a check" when your financial independence day arrives!

Realize that all growth vehicles are not designed the same... neither in terms of expected returns, risks of loss, legal liability shelter, nor tax treatment. There are some growth vehicles that behave better in some areas, but there is always a trade-off in the other areas as well.

A good fee-based, or fee-only, financial planner who is well versed in the financial realm known as "home equity and safe growth management" is what I would probably recommend to you to help you begin to understand and plan out how to use various instruments both in the present, and on a planned-out basis as you proceed into the future. Such advisors don't usually cost too much (though hourly may look pricy,) but the results are the difference between a safe retirement and not.

You say that you are repeating yourself, but this is all news to me!

Please pardon my appearing exasperated... I am definitely not that.

I do hope this is all helpful... both for you, and for the various folks who read voyeuristically with eyes wide-open and jaws on the floor (and even those who think "they know better" and snicker scornfully ;~)

Cheers,
Dave Donhoff
Strategic Equity & Leverage Planner


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RE: Risks of having equity in your home?

Even if I don't take your advice fully, I do enjoy the information and your writing is very good irrespective of the controversial content!

I'm in a very stable field and more significant other's employment is even more stable. I will have a half-year's living expenses remaining if I write the check right now.

It's a bit out of order, but once the thing is paid off, I will max out my retirement contributions with the mortgage money that I no longer have to pay. That's the plan for now anyway.

My objective is always to create a situation in which we can live on one of our paychecks and still be able to save. This was part of my "let's get rid of the mortgage!" rationale.

One way or the other, I have so much equity in the house right now, I am... from your perspective... rather vulnerable from the litigious angle. I suppose you would say that I would be even more vulnerable if I pay the whole thing off.

So are there any web sites touting the risks of a home payoff?


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RE: Risks of having equity in your home?

Hi Kelton,

So are there any web sites touting the risks of a home payoff?

Well, yes... there are various sites around, but I'm not familiar with any non-commercial sites (yet.) Much as with smart financial management in virtually all other areas, you could search or Google, and then read "with careful BS filters on" to weed out the sales hype from the financial facts.

I have a 'Leverage Planners" site in development that will be highly educational & informative (as I have designed my mortgage site,) but they are both commercial as well... hopefully they are objective & reliable enough to be read with credibility, and there's zero "weeding out of hype" at them.

If you keep asking questions here, though, I will keep answering & explaining (time permitting.)

Cheers,
Dave Donhoff
Strategic Equity & Leverage Planner


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RE: Risks of having equity in your home?

Thanks.
If I end up paying off this mortgage and lose the whole deal through a law suit, perhaps you can use me in one of your web bits about the risks of my behavior!
We can do a photo shoot with me looking sad and broke....drinking booze from a paper bag.
"I shoulda listened to Dave" kinda thing


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RE: Risks of having equity in your home?

Even IF you have no equity in your house and lose a lawsuit they can put a lien against your house that will have to be paid when you sell etc. If you borrow the equity and put it in investments, it is still an asset. Maybe I should borrow the money & lose it in the stock market and then I would be safe.


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RE: Risks of having equity in your home?

I don't think it is very rational to base such a decision on the potential of losing the asset because of liability in an actionable matter.

First, get the personal umbrella policy as another poster mentioned above. We have a $1 million PUP and we pay about $130 a year.

Second, if you are involved in a lawsuit of some kind and are insured, the plaintiffs are looking for the insurance money, not your house or your 401K. These are the car accident claims, dogbite claims, premises slip-and-fall claims. Claims where there is an allegation of negligence. This is the business I am in, and I know how it works.

Third, the type of claim that would have someone potentially looking past the insurance to take your personal assets is typically something very different. It involves reckless or wanton activity (driving drunk, excess speed, keeping a dangerous breed dog that has already bitten someone once, etc.), or could involve intentional acts, for which there is likely no insurance coverage at all, like assaults, batteries, etc. Or even a forfeiture/seizure of some kind that would be triggered by violation of certain laws (drugs, mainly).

So, wouldn't the prudent thing to do be to endeavor to live one's life so as to avoid these risk exposures? I don't think I'd forego the security of a paid-for home because I was afraid someone would take it away from me.


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RE: Risks of having equity in your home?

Folks,

So much focus and waiving-off of the litigation risks... which are probably the most foreplannable, and of which there are the most alternative options to use to protect against.

Solving for the risks of litigation, you are STILL left with;
Market valuation risks (no... real estate does NOT always go up. nor "never go down.")
"Acts of God" which insurance either fails to cover, or which causes ambiguity of coverage,
Personal disasters, unemployability, family emergency demands, etc.

In the end, you can try to scramble to cover all the POSSIBLE moving-target risks, or you can merely choose to move your net worth out of harms' way and into more safely managed vehicles than unleveraged real estate equity.

A "paid for" home is ABSOLUTELY a desirable outcome... Do it when you can AFFORD the risks of all that equity value standing open to the unforeseen, and do it when you can afford to do it in one stroke of a check.

Trying to "tiptoe through the equity-vanishing minefield" merely to achive a non-financial "emotional luxury" is neither conservative, nor responsible.

The prudent, conservative strategy is to "build a bridge" over the equity leverage with alternative safe-asset accounts that can eventually be dissolved and transferred to the illiquid real estate equity as an emotional luxury.

Cheers,
Dave Donhoff
Strategic Equity & Leverage Planner


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RE: Risks of having equity in your home?

I think taking an equity loan out is not the thing to do. Now, you're even more vulnerable when you're already worrying about what would happen if you couldn't pay the mortgage.

I think paying the house off early is also the wrong thing to do in these financial times. Having a house paid for is an advantage in that if you have job loss, you might be able to make enough to pay taxes and insurance. So it's a feeling of safety to have the house paid for. But money in a house is dead equity. You should be using extra money at this time to build cash. I would stop making the extra payments and horde the cash. Put it in a money market. The next 2 years are going to be tough ones--buy only what you need as stagflation sets in even deeper.


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