Friday, August 3, 2007

Does "my house" = "my money"?

A comment in one of my articles reviewing a mortgage product got me thinking hard about the way we view our homes. What does a house represent? Sure its our homestead, where we raise our families and build memories. But is it an investment? Is it an asset or liability? Is it an ATM machine? Anonymous wrote:

in the 30 yr, I have to apply for HELOC 2nd or refinance again to get that money (MY MONEY) back!" Thus, I HAVE TO PAY (MORE MONEY)TO GET MY MONEY BACK!
What struck me about this was this idea that the HELOC was allowing us to get back "our money".

Is a house a source of cashflow? Let's look at that for a second. A house worth $200,000. You own it, you may or may not have a mortgage on it (so technically the bank owns most of it), you have (hopefully) "equity" in it. A HELOC is a "Home Equity Line of Credit".

If I buy a house, I've purchased something. The only way to really get my money back is to liquidate it. To sell it. Real estate is an "investment" because unlike just about everything else you buy, its value usually appreciates. So where do equity lines of credit fall in? Well, based on the value vs what I owe on the home, I can take out a loan using my equity as collateral.

How, may I ask, is this any different than going to a pawn shop and taking out a loan with a Rolex as collateral? Is that really "my money"?

It's a fallacy, I think, to regard your equity as money. It's not; it's simply the value of something you own. The only way to cash it out is to liquidate it. Anything else is simply a loan, a loan granted to you based on the presumed ability for you to pay it back because you have a large asset that you can liquidate.

However real liquid assets (cash) sitting in the bank earning interest does not equal a loan, where you pay interest. In fact, by taking out loans on your house instead of saving money and using that as your purchasing power and/or emergency fund, you are killing whatever "investment" your house might represent.

Borrowing money does not build wealth. A house is not an ATM. It is not "your money". When you take out a loan, any loan, you are paying someone else for the privilege. How is that "my money"?

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