People purchase homes for a variety of reasons. Some want the stability of owning their own home, while others also look at home ownership as an investment vehicle. No matter what the reason, the truth is that home ownership has proven itself to be a good stable investment over time, and one that many are profiting from.
In years past, many saw their homes as a shelter of safety, yet today they are more than ever before willing to borrow against the equity owned in their homes to further their investment portfolios, get out of high cost debt, send their children to university, make improvements to their home or even boost their RRSP contributions. Where home equity was once sat upon, today it is something that can be tapped out and used to one’s advantage. Ultimately, it boils down to a person’s comfort level. There is nothing wrong with just getting your mortgage paid down, and living in your home free and clear. It can provide a great sense of comfort knowing that your home is bought and paid for.
There are a few approaches to dealing with the equity in one’s home. As I just mentioned, one approach is to pay off your mortgage and let the equity in your home basically sit there as a safety net. On one hand it isn’t making you any money, but on the other hand it isn’t costing you anything. And ultimately we all need a place to live so the opportunity cost of having that much equity just sitting there is offset by the costs that you would otherwise incur to have a place to live.
Another approach is to leverage the equity in your home to pursue investments that will net you a higher rate of return than what you are paying in interest on your mortgage. The idea here is to utilize the equity in your home to purchase investments that could include stocks, bonds, mutual funds, rental properties, a business or any other income-producing venture. Since mortgage rates are generally quite low in comparison to the returns on a lot of investments, a person will come out ahead in the long run.
The downside to this approach is the additional risk that the homeowner is taking on by doing this. For example, if you took $100,000 in equity out of your home to invest in the stock market and you are paying three per cent interest on your mortgage, and then invested that money and achieved a return of eight per cent, you have just leveraged the equity in your home to make money. But… If the investment goes bad you still owe the $100,000. So it can magnify the gains you make, but it can also magnify the losses. It is very important to speak to a qualified financial advisor before pursuing this strategy.
Another way to take advantage of the equity in your home is to refinance to pay down high-interest debt. The idea here is to lower the amount of interest you are paying because mortgage rates are much lower than most credit cards, personal loans, vehicle loans, etc. The net effect is that you are now able to pay less each month on the same amount of debt, or keep your payments the same and pay much less interest.
A person can also refinance and use the money to make improvements to the home, go on a vacation, or purchase something like a boat, camper or ATV. This can be risky in a way because money is much easier to borrow than to pay back! But as long as a person is disciplined with this approach, it can be a sound way to purchase items that you plan to purchase anyways.
While tapping the equity in your home can be a good idea, you should do so with caution and understand any of the possible consequences. The best thing you can do is consult a licensed mortgage professional and financial planner to discuss opportunities to make your home’s equity work for you.
Dean Bala is a mortgage broker and Realtor working out of the Creston Valley Realty office in Creston. For more information, he can be reached at 250-402-3903 or dean_bala@yahoo.com.