Use your Home Equity For Debt Consolidation

Home Equity? Use it or you may lose it!

This article is for all the home-owners out there in America that are sitting on their home equity thinking it is good investment. In actuality this equity is earning absolutely no rate of return. In fact this type of financial management is as primitive as digging holes in your back yard to store your cash. If you want to get a head and build real wealth that is safe, liquid and has a decent rate of return you need to take that equity out of the home.


I have been in the financial management business for over 16 years and specialize in debt consolidation with Mortgage Wealth Creation. All to often I meet with home-owners that have paid down the balance of their mortgage at interest rates between 4-8% tax deductible interest* only to have large credit card debts that they are paying 16-21% non-taxable interest. Or the home-owner(s) have paid down their mortgage, but have absolutely no savings, no emergency nest-egg and are basically at the mercy of their next paycheck. Let’s take a look at these two situations in more detail.

Make mortgage interest your ally not your enemy

Because of its’ deductibility factor mortgage interest is preferred interest, whereas credit card interest in non-preferred. For example let’s say you are a married couple filing a joint tax return with a combine annual income of 75,000. You and your spouse have built up credit debt of 15,000 and pay an average interest rate of 16% non-preferred interest per year. This means you will pay $160 dollars of interest per $1000 of credit debt. In this example the formula is $160 X 15 = $2,400 in interest per year, $200.00 per month. Now if we are able to consolidate this credit card debt into our mortgage at 6% the annual interest is reduced to $900 dollars per year ($60 X15) or $75 per month. Just this step alone is a savings of $125 per month, $1500 per year. Now let’s take this a step further and say we were able to deduct this interest of $900 from our income at a 33% tax bracket. Our annual income is $75,000 minus the $900 in preferred deductible interest. Our new taxable income is $74,100. This equates to an additional savings of $300 less in tax payments ($900/3). So to sum things up the annual savings from moving this debt from non-preferred interest to preferred interest is $1800 per year. If you were then able to compound this savings over a 10 to 20 year period we are talking about tens and possibly hundreds of thousands of dollars in savings.

But paying down my mortgage is safe, right? WRONG

Now let’s look at the other argument that says your home equity is a safe investment. Many home-owners think that paying down their mortgage is a forced savings plan, and when they are ready to retire they will have a nice nest egg when the home is sold. The principles of a sound and safe investment are three fold; safety, liquidity and rate of return. Let’s take a closer look to see if Home Equity meets any of these investment principles.

Is your home equity safe? Well let’s say your home is in a neighborhood that was devastated by a tornado, flood, earthquake, fire, hurricane, termites, black mold, or a failing economy. Would you rather have your home mortgaged to the hilt and your equity in a safe and insured side fund, or would you rather of had your home free and clear with no side funds. Don’t make the mistake of putting all your hard earned money under your roof.

Is your home equity liquid? Most home-owners don’t take out their equity unless the unexpected happens such as in the loss of employment, disability or some other financial crisis. Have you ever tried to get a mortgage when you were unemployed, between jobs, or unable to work? Most banks only loan money to us when we don’t really need it. It’s better to take the cash out of your home in the good times, and keep your equity in an interest bearing investment for when you need it. The banks are not going to let your payments slide for few months whether you have equity or not. By keeping your equity in a side fund you are in control of this money not the lender.

Is your equity earning a rate of return? Absolutely not. Don’t get home equity mixed up with home appreciation. For example, Neighbor A and Neighbor B each own a home valued at $200,000. Neighbor A has a mortgage of $100,000 and Neighbor B has a mortgage $150,000. If both homes appreciate at an annual rate of 5% they are now worth $210,000. Even though Neighbor A and Neighbor B had different amounts of equity, their asset value is the same. Equity has no affect on a homes appreciation.

Homeowners need to manage their equity to build wealth. For many Americans the home is your greatest asset and your greatest liability. This is why it is so important to receive professional mortgage planning advice. Thousands of dollars are lost every year because homeowners get the wrong mortgage advice or do not restructure their mortgage on a regular basis.



Mike Snider is a Mortgage Planning Professional and Branch Partner with a national mortgage bank. His company specializes in Debt Consolidation and Home Equity Wealth Creation. To get a free mortgage analysis and to learn more about Mike visit his website www.PayItAllOff.com