Common Questions about Home Equity
Why is home equity not a prudent investment?
Home equity is not liquid or safe and has not rate of return. When times get tough those who lack liquidity have no choice but to liquidate their assets (home) at low prices and survive the best they can. If you were in a neighborhood that was devastated by an earthquake, flood, tornado, or hurricane and your home was destroyed, you would rather have your equity in a safe and liquid environment.
How should I manage my home equity?
Only borrow equity to conserve and not to consume. Always position yourself to act instead of react to circumstances over which you may have no control. Look at implementing arbitrage. Undisciplined borrowers who use home equity to consolidate may enter a cycle of debt proliferation, which can lead to bankruptcy.
How does arbitrage work with these financial concepts?
A homeowner can safely make thousands of dollars’ profit by borrowing money at one rate, such as 6 percent, and investing the loan proceeds at the same 6 percent, especially when two conditions exist: the borrowing interest rate is deductible and the investing interest rate compounds under tax-favorable circumstances.
How do I choose the right investments with my cash?
When choosing a place to save, invest, or store cash for conservative, stable returns, we want to ask ourselves the same four questions we ask with regard to our home equity:
- Is it liquid?
- Is it safe (guaranteed or insured)?
- What rate of return am I likely to get?
- Are there any tax benefits associated with this investment?
Why should I use insurance for my retirement or investment money?
Many investors in America don’t realize that many major life insurance companies are not much different from a conservative mutual fund type of asset management company. Insurance companies are experts in managing risks. As they bank and hold money set aside for future needs, they are responsible for investing that money wisely to achieve a safe rate of return.
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