Episode 077:

Home Equity Fails Rate of Return Test

What’s the rate of return you earn on your home equity? Did you say, “Oh, over the last 30 years homes appreciated about 5-7%” or something like that? You just made a mistake that’s costing you thousands of dollars per year and causing you to carry unnecessary risk. Homes appreciate but the dollars you store inside of your home (home equity) has not rate of return. At best you are saving the net cost of a tax-deductible mortgage payment which might be 2.8%-3% in 2016. Listen in to hear why home equity fails the rate of return test and what to do about it.

Included in this episode:

We have now talked about how Liquidity and Safety fail the Four Tests of a Wise Investment.. today we are going to dive into Rate of Return


Four Tests of a Wise Investment

“How does it perform as an investment?”

Test 3: Rate of Return = amount if interest earned

  • Home equity does not earn enough rate of return to keep up with inflation
  • People think real estate is a great investment, so they put all of their money into that property
  • Yes, a wise investment because typically the value of the home goes up over time = appreciation
    • However, the mortgage you have in your home has nothing to do with appreciation!
  • The Question to ask about Home Equity is, does it have a rate of return and if so, how much are you being paid for it?
  • Every dollar you choose to take out of investments and pay against your principle, costs you whatever amount of interest you could have earned on that dollar
  • How much interest are you paying on your mortgage versus how much interest you are making on your investments

Important links:

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Charlie, your host:

CharlieMedium“Charlie Jewett is an Author, Speaker, Podcast Host, Consumer Advocate, and Investment Advisor from San Diego, Ca.  Charlie has spent the last eleven years trying to change the way the industry professionals and consumers think about Retirement.  Charlie provides education materials that help people to create their own financial plans and offers services to protect consumers from the bad guys in the Financial Services Industry.”  

 

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