Home Equity -The New ATM

On the economic news this morning the commentator made the following remark based on a recent CNN study: "In 2006 homeowners are using the equity in their home as an ATM machine". Cashing in on equity is not a new idea, however since interest slid from well over 10% in the early 1990's to a recent wholesale rate of only 1% on an adjustable rate, homeowners have been pulling cash out for all kinds of toys, trips, tips and/or remodeling, debt consolidation and even investing in alternative investments. The Greek Mathematician, Archimedes said, "Give me a lever long enough, and a fulcrum on which to place it, and I'll move the world". Leveraging a powerful aspect of real estate investing

Unlike any other investment vehicle, real estate leverage is a huge benefit. Think about it, you can have the whole "bundle of rights" and control the entire asset while investing only a fraction of the cost up front - in fact in many cases nothing down at all. Your equity increases as the market drives appreciation upward, the principal reduction on the loan further increases equity and if the house is rental real estate, the tenant pays off the loan for you. How much better can it get than that??

 Let's stop here for a minute and consider the difference between "home equity" and "investment real estate equity". Before I became a real estate broker, I considered my home as an "investment". While technically that may be true, think about it. For all you men out there who justified the purchase of a diamond ring for your wife as a prudent "investment", just try taking it away from her and selling it when times get tough! By the same token it is almost impossible to liquidate a man's castle or a woman's family nest even during a threat of foreclosure. Because the approach is totally different, one may be well advised to think twice before mindlessly using your home as an ATM machine.

 If you analyze the risk to reward as shown on an "Investment Pyramid" you will notice that your personal residence is located along the foundation of the pyramid with cash, savings, retirement programs, life insurance, certificates of deposits and checking accounts. As you move up the pyramid you will find income producing real estate rental property about half way to the top. As an investment strategy, it doesn't get much better than leveraging here by pulling out cash from equity through refinancing to build wealth, acquiring additional real estate, diversifying or even sending the kids to college - while having the tenant continue to pay off the new loan! 

However, in spite of the fact that in 2006 the adjustable rate interest loans on personal residences (home loans) are coming due this year, homeowners continue to be barraged with zero interest loans, reverse mortgage schemes and teased with coupons to get "cash back" at closing. One study shows that there are over 1 Trillion dollars in adjustable rate loans coming due this year. 

It doesn't take a rocket scientist to see the crack in the foundation of the real estate market as conventional interest rates begin to rise, foreclosures increase by as much as 82% and the softening in the housing market across the board. The same study showed that now 1/2 of a couples' income is used to service their home loan. 

The possible solution for many of these owners is to shop for a "fixed rate" 30 year loan combined with an accelerated repayment plan. This combination could quickly accelerate equity by reducing the principal at a rapid rate. Many just "bail out" with equity equal to the proverbial sack of donuts. 

Another solution for those who have reached or are close to reaching the end of their financial rope in terms of ability to service the increasing mortgage payment due to increase in the adjustable rate, a land trust could be the answer. There has been an exponential increase in the number of land trusts held by the Corporate Trustee (Equity Holding Corporation) in the last year. Homeowners (Settlor Beneficiaries) are able to salvage all or part of their equity while getting investment capital to tide them over from an investor (Investor Beneficiary). For more information on this, please go our web site at: www.equityholding.org and click on articles. These "investor beneficiary" interests are a new kind of CASH FLOW, with returns certainly worth looking into. 

Note investors should use due diligence when purchasing seller carry back notes from sellers who have sold "subject to" an existing loan or with buyer getting new loan and carrying back a second trust deed. Look at the closing papers to assure the buyer has something to loose (a good size down payment) and that a notice of delinquency (in addition to a notice of default) is included along with a tax service being provided. If the seller is "overly anxious" to dump the note perhaps he knows something you don't. Review Henry Dvorkens' "7 reasons why people sell notes". " Zero Equity = Zero Ka-ching at the Cash Machine" 

COPYRIGHT 2002, 2006 by Tom Standen - ALL RIGHTS RESERVED This article cannot be reprinted without the express permission of the Author - 11-06