==== ====For more tips on Safe Mortgage Investing go here:www.Mortgage-Acceleration-Map.com==== ===="My house is earning a...
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Does Home Equity Earn a Rate of Return on Investment

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Does Home Equity Earn a Rate of Return on Investment

  1. 1. ==== ====For more tips on Safe Mortgage Investing go here:www.Mortgage-Acceleration-Map.com==== ===="My house is earning a great rate of return, I am so glad I have my equity there." Manyhomeowners mistakenly believe this statement is true. They send extra payments to theirmortgage company thinking this will enhance their homes appreciation. They invest extramortgage payments in their homes equity. Alternatively, they buy a new home reinvesting all theirprevious homes equity. In both cases thinking they are earning a great rate of return and makinga prudent investment. Unfortunately, they dont know what they dont know.That is, home equity has no rate of return and it is not a prudent investment.First, let us illustrate why equity has no rate of return with two examples. For simplicities sake wewill assume a $100,000 home and a five percent real estate appreciation rate in all the examples.1. A $100,000 home with 100 percent equity appreciates at 5% over one year to $105,000.2. A $100,000 home with zero percent equity appreciates at 5% over one year to $105,000.In both examples, the house appreciated five percent regardless of the amount of equity in thehouse and was worth $105,000. The amount of equity in the house had no impact on theappreciation of the house. Therefore, keeping your money locked-up in equity in your house is notincreasing your rate of appreciation. If the amount of equity does not improve your rate ofappreciation, then it has not earned a rate of return. In addition to not earning a rate of return,equity is not a prudent investment because; equity in a house is not safe or liquid. It is not safebecause housing prices can drop and your equity does with it. It is not liquid, because the onlyways to access your equity is by selling your house or borrowing the equity from the bank. Let usexplore these two topics.Home equity is not safe.Rate of return aside, let us look at equity from a safe investment standpoint. The point of investingis to make money. To make money on an investment there needs to be a positive rate of return.With a negative rate of return, you lose money, and with no rate of return, your money just sitsthere. Since equity has no rate of return, which means no interest rate is compounding andmaking it grow. The only way that equity changes is with the unpredictable fluctuations in the realestate market. In a falling market, equity locked-up in a house can shrink significantly.Home equity is not liquid.Liquidity is a big problem with equity and real estate in general. In the worst case, you need themoney for an emergency. The only way to access your money is to take out another loan. If you
  2. 2. are out of work or disabled, can you qualify for a loan? Fat chance your banker will say yes to aloan. Banks are rarely in the business of lending money to people who really need it. That meansthe only way to have a chance of getting that money trapped in equity is to sell the house. If youare a buyer and you know the seller is out of work or disabled then are you going to offer themtheir selling price or will you wait and offer them less? If it sits on the market for too long-the bank,which is fully aware of the amount of equity build-up in your house, swoops in, and repossesses it.What is the solution for trapped home equity?The solution is Home Equity Management. This concept is based on four premises: (1) your homeequity should be liberated from the illiquid brick and mortar of your home; (2) your liberated homeequity must be safely and prudently invested; (3) your liberated home equity must earn apredictable compounding rate of return-better if this is also tax-deferred; and (4) a positive interestrate arbitrage between the mortgage interest and the investment rate of return.1. Equity can be liberated--cashed out-- either with a home equity loan or refinancing the existinghome loan. This is the fist step in protecting your equity from the inherent liquidity problems ofbrick and mortar real estate.2. Once liberated it should be prudently invested in liquid financial instruments free from marketrisk fluctuations. Instruments such as investment grade municipal bonds, tax-deferred annuities,indexed annuities, or investment grade life insurance contracts.3. All these prudent financial instruments earn a predictable compounded rate of return. Theseinvestments also contain guaranteed elements which create predictability in the rate of return. Inaddition, they all earn either a tax-free or tax deferred rate of return.4. The compound rate of return on your invested home equity should be equal to or greater thanthe simple interest on the mortgage to create a positive interest rate arbitrage. If the mortgagesinterest is tax deductible, this enhances the interest rate arbitrage.Your home equity when properly managed using these four premises becomes a valuable andflexible part of your financial pan. Provided, that is that your cashed-out equity is invested in a safeand predictable vehicle, where there is liquidity and guarantee of principal, compounded interestrates in a tax free environment--such as one option listed-in an investment grade life insurancecontracts. Then your equity can grow tax deferred and unaffected by market fluctuations. In thissituation, the money is also highly liquid. It can be accessed free from income tax. In many cases,it can be far more valuable than 401(k)s and IRAs which are taxable at retirement. Furthermore,when it is all said and done, by investing in a investment grade Universal Life product you leave asizable death benefit to your heirs, all from money that would otherwise be sitting in some mythicalland where it is called equity, earning nothing.Arthur W MitchellPresidentArthur Mitchell & Associates
  3. 3. Helping people diagnose and discover their true values and true wealth on a moral, spiritual,physical, and financial level and guiding them to find clear answers and superior solutions withintheir value system that will bring clarity, focus, balance and confidence into their lives.800-276-5308web site: http://www.artmitchell.comevents: http://events.artmitchell.comCA Life Insurance: 0679305CA Continuing Education Provider: 172650Article Source:http://EzineArticles.com/?expert=Arthur_Mitchell==== ====For more tips on Safe Mortgage Investing go here:www.Mortgage-Acceleration-Map.com==== ====

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