Money Experiences

Tuesday, March 07, 2006

What your house is really worth

I just read an interesting article on Bankrate that argues that Ballooning Equity Doesn't Mean You're Rich.

Even though your home value may be rising and rising, there's only a few ways to actually turn that into spending money:
1. Selling the home and moving to a less expensive one.
2. Refinance
3. Getting a reverse mortgage
4. Selling the home and moving to a less expensive area.

Rising home prices may cause your net worth to skyrocket, but it doesn't mean that you can afford to go out and splurge on that $10,000 big screen surround sound shake-the-room home theater system. In the end, the prime attraction of additional home equity is as a source of funding to act as protection against emergencies.

My thoughts:
This article is very Rich Dad-ish by making the same argument in valuating home equity as Kiyosaki does for valuating capital gains: until you actually have the cold hard cash in your hand (or bank, preferably), your disposable income hasn't changed. All you have is wealth on paper.

As far as the means that the article listed of tapping your equity to increase your spending money:

1. Definitely my favorite choice among the four, and especially good if you're retiring or you've become an empty nester, though it's not necessarily an option if your family is growing.
2. This is just another way of gaining debt, and we all know that that's a big no-no. I'd really only consider this for an emergency
3. Unless you're older, few companies would be willing to make this deal with you
4. Completely uprooting your life doesn't sound too cool to me. I'd think that unless you're (a) retiring or (b) moving due to work anyways, this could be a very complicated and risky way of earning money. Don't do this just for the equity.

I'm in the process of buying a new town home, and the seller called me the other day to say that they were jacking up the prices by $10,000, so I had $10,000 of instant equity. This article sort of ruins the high that I'd gotten off of that news, but at least it'll be good for an emergency, and I can be thankful that it hadn't gone up like that before I was locked in to the price!


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