Ah… the joys of summer. Warm days, outdoor activities, driving with your sunroof open, and wondering if a natural disaster will wipe out your house.
It seems more and more natural disasters and whacky weather assail us with each passing summer. Whether you’re in the fire/mudslide/earthquake Western U.S. zone, the tornado/flood zone of the South and Midwest, or the tornado/flood/hurricane zone of the East, Mother Nature seems to have surprises in store for us all from time to time. All of this is part of nature, but it saddens me how underinformed people are about the financial risks they are taking by following traditional advice when it comes to protecting their #1 asset- their homes.
It’s interesting how little people are willing to “work on” their thinking. Henry Ford said that thinking is some of the hardest work you can do, and that’s why so few people do it. Are we just lazy mentally, or are we too bombarded with messages that vie for our attention that we forget how to think independently?
Take home equity, for instance. I have seen person after person lose their home because they left equity trapped in it, and when an emergency came up they couldn’t get access to it. Or something happens to the house (like Katrina), and they have to wait for eons to get their own money back.
Traditional thinking limits us in many ways. For example, most of us are taught to pay our house off. It’s good advice as far as paying less interest, but at what risk? Home equity is a large chunk of most Americans’ total wealth, and I contend that it’s needlessly at risk of being lost.
Simply take the “access test.” When something happens to you OR your house, would you rather have your money tied up where you can’t get to it or would you like to have it liquid? I’ll take the liquid choice, thank you. On page 76 of my book “Why Didn’t Anyone Teach Me This?” (FinancialPlanning202.com) I told the following story: When I was a loan officer, I watched a guy lose $100K of his home equity because he got laid off and didn’t qualify to get a loan to refinance his house. Sadly, he lost the house to foreclosure.
So… the moral of the story is: you can’t control the weather, but you CAN control how liquid your home equity is. Have access to it while everything is fine… refinance it to 100% LTV or have a Home Equity Line of Credit (HELOC) open on it (*make sure you get one that is convertible to a fixed rate 2nd mortgage if you have to use more than 50% of it). When the storms of life come (either through financial emergency or natural disaster), you’ll be in a much better position.
And if you’re willing to grow your thinking enough to grasp and implement this strategy, you may even be able to break even or make a profit safely on your home equity while keeping it liquid. But only if you’re willing to do the mental work of thinking.