A couple of weeks ago, Shailesh (fellow genius) wrote about how equity management is overrated. Personally, I think it is underrated as it is often misunderstood. As many believe, he went on to explain how it is about debt leveraging, putting off paying down your mortgage in order to invest instead. He even went on to mention that it seemed to make sense during the housing boom, but doesn’t anymore. Please read his post as he mentions a lot more about his perspective.
Truth be told, proper equity management goes far beyond the simple debt leveraging. It is really about striking a balance between managing both debt and equity to enhance one’s overall financial and investment plans, putting one’s financial plan on steroids if you will. It is not something that is easily understood in its entirety, so don’t feel left out if you don’t follow what I am talking about.
Due to the rules of money, such as the time value of money and truths about home equity itself, paying off your mortgage can prove detrimental to your finances, costing hundreds of thousands of dollars over time. Mortgage planners (those which supposedly know equity management) provide education on these concepts, then take your situation and create a customized “mortgage plan” that will help you meet all of your financial goals, using your mortgage as a tool.
To add to the confusion, equity management may tell someone it is better to pay off the mortgage, though that is very rarely the case. Most often it does suggest use of those exotic loans that have gotten a bad rap due to their misuse, so keep an open mind. To understand equity management, you have to understand the concepts and why it works. It is also best for those which have the discipline to stick with the plan.
I am sure you are wondering what concepts I am talking about. Some things you may not realize are that home equity has no rate of return and is not a safe investment overall. Every dollar you send to pay off your mortgage is a dollar you have lost access to without refinancing, which in a financial crisis will not be an option. So, a god question to ask yourself would be which would you rather have $50,000 in equity or $50,000 in a safe investment account?
Shailesh says he has never been comfortable with equity management and I respect that. It certainly is not for everyone. He does talk about his concerns and so let me address them…
The first was about mortgaging to the hilt and the market crashing as it has. Well, if the equity was invested properly, that drop in value would be offset by the money in the bank, only now you would have “lost equity” working for you. If you had to sell the home for a loss, it would actually be better to have money in a side investment to pay off the loan than to end up in a short sale or even break even.
The second concern he had was what about life events? Well, as with any financial plan, equity management has to change as things change, which is why you need to revisit your mortgage plan regularly. As for having cash to switch homes if need be, the answer should be yes, again if properly invested.
The third he talks about is studies showing since most families stay in a home only 7 years and refinance every 4 on average, equity in your home is the best way to ensure mobility. I disagree for various reasons, but one would be that during that same time period, little equity is actually built up for most. Another would be the added flexibility, liquidity, etc. that equity management provides.
The last concern he described was that it doesn’t work fro those with tight budgets, erratic spending patterns, those with credit card debt, etc. I again disagree here as proper equity management will develop a plan that works with anyone, catered to the individual. Equity management is not reserved only for the wealthy, and the reality is that it can help the average family become wealthy.
Again, I respect Shailesh and his concerns, but as one who practices equity management myself and has provided many families mortgage plans that are helping them meet their financial goals by using their mortgage as a tool, I have to disagree with it being overrated. The bottom line, as I see it, is equity management can help anyone, regardless of what the markets are doing since it is centered around the individuals financial goals and dreams.
Unfortunately, there are many “mortgage planners” that don’t implement equity management properly, causing more harm than good. If it is done properly, you can reap huge rewards. But as Shailesh is concerned, equity MISmanagement can prove disastrous as well.