Is Most of Your Wealth in Your Home Equity?

If most of your wealth is in your home equity, you might want to reconsider your position. As hundreds of thousands of victims of Hurricane Katrina learned, home equity can vanish overnight and through no fault of your own. Even the tired old argument that they should have thought of that before choosing to live in the path of a hurricane is useless because there are natural disasters everywhere. Fire, flood, tornadoes, lightening, "sure thing" investments, outsourcing, and other forms of economic migration all have the potential to destroy everything you have worked for all your life simply by wiping away, or severely diminishing, the equity you have in your home.

Using your home equity to fund other investments is the height of foolishness, no matter how smart the salesman (loan officer, banker, stock broker, etc) makes it sound. Suppose you do use your home equity to fund another investment and something happens - either to the other investment or to your home? What do you do? You could lose the other investment, your home and the ability to purchase another home. This is bad business all the way around.

Suppose you are one of the fortunate ones, and no natural disasters hit your town. However, you wake up one morning and find that the local major employer has moved out of the country, leaving hundreds of families in your area without work. Most will sell out and move on, and the equity in your house will be diminished because of declining economic conditions in your area. If you sell now, you'll barely be able to pay off your current mortgage and put a down-payment on another 30 year mortgage in another area. The result is - stay or go - your home equity "wealth" is gone.

Now, let us for a moment consider that natural disaster, for whatever reason, has struck. It could be fire, flood, tornado, lightening, or hurricane - it really does not matter which. Are you so foolish as to think that your lender will care why your home was destroyed? ...or that you cannot pay your mortgage because you now have to pay for another place to live? Do you really believe that your insurance company is going to pay you for your damages? Not if they can get out of it, they won't. Ask any homeowner who survived Hurricanes Katrina and Rita, or any homeowner who had a fire that their insurance company could suggest was caused by their own negligence. You will still owe your mortgage and there will be no way out.

You console yourself with the thought that, if your equity is destroyed and if your insurance company will not pay, you will simply walk away and let your lender have the house back. That is not going to solve your problem. If you walk away, the lender will foreclose on the loan and obtain ownership of the property. They don't want it, so they will sell it. Unfortunately, it is a wreck, so it will barely bring pennies on the dollar, certainly not enough to pay off the mortgage that you owe. Their answer to that is to sue you. They'll get a judgment that will be levied against all of your remaining assets and/or future earnings. Under the new bankruptcy laws, you might not be able to discharge such a judgment, leaving you in the position of still having to pay off the original mortgage.

Home Equity? As the safest form of investment? As the major part of your personal wealth?
You might want to rethink that concept.

It might not be such a good idea to think of the equity in your home as being the safest place to build the majority of your personal wealth. Life itself is not stable enough, these days, to take that kind of risk. That is not to say that you should not buy a home, or that you should not be tickled pink if you do buy a home and sell it at a huge profit. If that happens, you are one of the lucky ones - and neither personal wealth nor secure investments should not depend on luck.