🧠Critical thinking about Home Equity

At least weekly I receive an email, text or paper letter from my mortgage servicer telling me that I should capitalize on my home equity. “Laura, you have an estimated $100,000 or more* available through the equity in your home. Now is the time to sit back, relax, and let your cash work for you.”

Oh, home equity. The great and mystical oz that solves all financial problems. Or does it?

The frequency and urgency of solicitations I have been receiving from my mortgage servicer could be viewed as predatory in today’s interest rate environment. Most of us who bought a home before March 2022 have a lower interest rate than what is offered today. And a new loan is what they are suggesting.

A cash-out refinance according to Forbes is in fact a re-mortgaging of a current home at a higher mortgage balance. The cash out would re-capture part of what I have paid down, add some of the market growth of my home’s value and add it to a new loan, paying off the old one. The new loan would, likely, be at a higher mortgage rate and a re-extended term.

The prize being offered “A cash out opportunity for Laura” is a cash payout with a reduction of the longer-term equity available later down the road. It is, at its root, a play to get higher interest income out of me with a larger balance and a higher rate. But it is presented like I am leaving money on the table. Actually my mortgage company feels they are leaving a better stream of income on the table if they don’t get me to respond.

Now, of course, there are occasions when this might make sense. If I had significant other debt obligations with a higher interest rate than the cash-out refinance rate, perhaps this might help me reduce my debt payment load. However, other debt eliminations strategies will also work for this without the 30 year (or 15 year if that’s the term) increase of my mortgage payment. That long leash of the mortgage has elastic in it.

Here is the truth of home equity. Other than selling, no matter when and how you access the equity, there are always interest and fees associated. Loans against the equity, line of credit against the equity, cash out of the equity, reverse mortgage of the equity - all roads lead to paying a mortgage company interest and fees. The hack is to sell the big house and buy down for cash.

We think of our primary homes as “the way that Americans have traditionally grown their wealth”. What if we paid compounded interest for 15 or 30 years to access our investment accounts? What if small businesses had to pay closing costs in order to use the cash from business growth? Sure there are tax and leverage strategies for high-net-worth folks, but for most of us...

What if we just bought less house and grew our wealth and our impact outside of the $11.92 Trillion residential mortgage industry?