Friday, December 5, 2014

GOT EQUITY Question Deserves A Hard Think Before You Act

In a recent news story in a southwest Florida paper, there was the headline, "Got Equity?" The premise was if you have equity in your home you can tap into that for all number of reasons.

My thought is, not so fast. It depends on why you want, or need, that money. Why is this a commercial/investment real estate story? You'll see in a minute.

A little history. One of the reasons the U.S. found itself in an economic quagmire caused by the real estate downturn was that hundreds of thousands of Americans, possibly even millions, used their homes like an ATM machine. Prodded on by greed and unsavory finance officers, people repeatedly re-financed their home mortgages, took out cash from equity that had built up significantly, then took trips, bought "stuff,"used it for extra little things.

Many people just walked away from those homes after taking out tens of thousands of dollars. For any number of reasons they had on way to pay it back -- they either lost a job, or had to undergo a pay cut, or perhaps had a need for a move but found they owed far more than the home was worth because the neighborhood had declined in value.

The combination of low home equity rates, combined with skyrocketing home values, is fueling this trend.

In the November newspaper story, when the question was asked "Got Equity," and "should you cash in on rising home values," the answer from several individuals was, "heck yes, why not?"

Well, for all the reasons above I would say, NOT.  Just be careful and think it through. If you are going to plow the monies back into your home for physical improvements, then I would say yes. If you are going to consolidate some personal debt you have, or pay off some debt, that again is a qualified yes, from my perspective.

(Please note I am not dispensing financial or legal advice, just sharing my opinion).

But cashing in on rising home values, like here in Collier and Lee County, Florida, where home sale prices are substantially on the rise, is something worth thinking about. While it is positive news for the real estate industry as well as the broader economy, I still worry that individuals will "blow" the funds rather than put them to productive use.

Another alternative (and yes here comes the know I would work this in, right?), if you feel you just absolutely have to pull money out, is to take equity out of the home, conservatively, and use it to invest in commercial/investment real estate. I have worked with a number of individuals over the years who have done just this. In essence, the money they pull out of their home is leveraged into an investment where a tenant(s, whether it be a commercial building, or small retail center, or multifamily, pays the mortgage via their monthly lease payments. HELOCs can also be used to invest in small rental homes, if that is the sandbox you want to play in.

Interestingly, according to RealtyTrac, southwest Floridians are taking out home equity loans at a rate that is double the U.S. national average. In Collier County, Florida, which includes Naples and Marco Island, among other cities and villages,  in the 12 months ending in June 2014 the number of HELOCs (home equity line of credit) was up 51 percent compared with the same period a year earlier. In Lee County (Fort Myers, Estero, Bonita Springs, et al) HELOC origination was up 55 percent. Nationally, HELOC origination was up 21 percent for the period, according to RealtyTrac.

My bottom line is this. If you are refinancing "because you can," ask yourself "should you?" And most importantly, "Why?"  And think long and hard about whether a 10-day cruise is really worth pulling money out, or whether it makes more sense to invest into something where you can take profits, plow them into your own personal pension plan, and fund your cruise from that nestegg.

Just be careful if you get "home-equity-itus."

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