Home Equity Management

Using the equity in your to generate wealth

A popular topic within mortgage circles these days is the idea of equity management. Spurred by the popular book "Missed Fortune 101" by Douglas Andrew many mortgage professionals are advising their clients on how to best manage the equity in their homes.

In addition to reading Missed Fortune I have attended several seminars to learn about this topic. I must admit that initially I was very resistant to this idea. However after thinking about the implications of these ideas I have come to the conclusion that this strategy can yield results for the right person within the right context. It can even be a way to funding your retirement or achieving other long term financial goals.

The Concept of Equity Management

The main concept behind home equity management is that you invest the "cash" that is trapped in your home to generate more wealth. If done correctly this cash should generate enough returns wherein your mortgage debt is easily payable at any given moment. This renders your debt "meaningless" and frees you to pursue your investments more aggressively.

The underlying perspective is that your home will appreciate regardless of whether you payoff the mortgage or not. Hence there is little monetary reason to pay off the debt. Rather it is better to utilize that cash towards a more profitable investment. It basically comes down to whether you would rather invest in a zero yield bond (which is your home) or invest in a more profitable venture (the S&P 500 has posted an average 10.5% per year gain over the past 70 years).

Two Methods

There are two ways to utilize the equity in your home. The first is to pull out the equity you already have in your home and invest it in a higher return investment. This strategy works due to arbitrage - the difference in the return on money and the cost of money - the exact idea banks use to make money on deposits.

The second less aggressive way to use the equity in your home is to obtain an interest only mortgage. You then invest the amount you would have paid in principle. I say this is less aggressive because you don't have the risk a large sum at a single instance.

There are situations where both methods can be employed to achieve an even greater return on your investment.

Where do I start?

As I mentioned before, this strategy is not for everyone. I would only recommend this after a thorough evaluation of your financial situation. I will venture to argue that this strategy is successful only if you are already disciplined in your finances and have a history of making sound financial decisions. This does not mean that you can not learn to use this strategy effectively to your advantage.

There is much more to this idea than just what I have written here. Please contact me directly if you would like to sit down for a free one hour consultation to determine if this is an effective strategy for your long term financial well being.

- Shailesh Ghimire
November 17, 2006

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Aimee Ghimire
Equal Housing Lender
BKBR-0105292

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