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Dear Credible Money Coach,
We were recently told by our finance agent that we have “too much equity” in our primary residence and a rental home and should make it work. Our home has a $315,000 mortgage valued at $1.1 million that is scheduled to be paid off in nine years. Our renter has a $42,000 mortgage valued at $390,000 that is scheduled to be paid off in four years.
My wife and I are 53 years old, planning to retire in six years, and currently have sizable retirement accounts of over $2.5 million. We can put the extra rental income to good use to supplement our retirement and like not carrying a mortgage into retirement. We have around a third of our retirement savings in Roth accounts. We also have $1 million in private liability insurance.
So is it “bad/wrong” to have so much equity in our properties? – John
Hi John, and wow! If having “too much equity” in your financial situation is wrong, I don’t want to be right. Congratulations, you’ve got your finances under control and a solid financial foundation for a good life in retirement.
Your finance broker may only be looking at a brush stroke in your overall financial picture. They see all the equity you have in real estate and think they could make that money work harder for you by investing it. They probably want you to consider a payout refinance so you can tap into that equity and use it elsewhere.
Investing is one of the many reasons people do cash out refinances. And if you’re considering a cash-out refinance, you definitely should comparison store with a resource like Credible that makes it easy to see pre-qualified refinance rates from multiple lenders.
Investing can be an excellent way to grow wealth, but the tradeoff for growth is an unavoidable risk. For this reason knock equity capital Investing is not for everyone. Let’s take a look at some important questions to consider when considering following your agent’s advice.
What is your current financial situation?
John, from your description you’re in good shape right now. Let’s list your advantages:
- Two properties that will be paid off in the foreseeable future (barring a financial crisis)
- Significant equity in two properties
- Reliable rental income from a property
- More than $2.5 million in retirement accounts
- $1 million liability insurance (although you may consider increasing this amount given your wealth)
Your financial situation appears secure at the moment. You probably have no trouble paying your bills, covering expenses, and putting money into your retirement accounts.
What is your situation likely to be in the future?
Of course, it’s impossible to predict the future with certainty, but based on your current wealth and real estate debt, it looks like you’re on track to reach your goal of retiring in six years. And as you continue to fund your retirement accounts, your savings will continue to grow to a number that should be enough to cover your needs (and more) in retirement – barring an unforeseen financial crisis.
How high is your risk tolerance?
That’s really a key question for you, John. You say you like the idea of retiring with no mortgage debt, and I’m definitely all for living your mortgage-free golden years. equity capital is like money in the bank (minus maintenance fees). You may need this money in retirement for important purposes like modifying your home so you can age in place.
Compared to investing, maintaining your home equity comes with a lot less risk. One reason is that the market influences that have the greatest impact on your home value (and therefore your equity) tend to be less volatile than those affecting stock values. For example, the war in Ukraine has caused significant turmoil in stock markets around the world, but it has not impacted US real estate values. While your Roth IRA balance may have lost a few digits, your home retained its value.
Of course, there’s a trade-off between choosing to hold on to your home equity rather than cashing it out and investing it. In good times, stocks can deliver returns that are likely to exceed the appreciation of your home by the time you retire.
What Do You Gain (And Do You Really Need It) With a Cash Out Refinance to Invest?
A Refinance cash out can be an inexpensive way to fund important goals like repairing or renovating your home, both of which can add value to your home in the long run. However, some reasons for using home equity are less reliable than others, and investing falls into this category.
Before taking your broker’s advice and contacting your Convert home equity into cash to fund investmentsit is important to ask yourself these questions:
- Do you really need the extra growth you’re hoping for?
- Can you achieve your retirement goals without risking your valuable home equity?
- Are you OK with risking your home equity for unpredictable returns?
- If you cash out your equity to invest, do you have time to recover if your investments fall in value?
Ultimately, only you can decide whether you prefer the security of your home equity to the possibility of a higher return from investing.
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About the author: Dan Roccato is a Clinical Professor of Finance at the University of San Diego School of Business, Personal Finance Expert by Credible Money Coach, Published Author and Entrepreneur. He has held leadership positions at Merrill Lynch and Morgan Stanley. He is a well-known expert in personal finance, global securities services and corporate stock options. You find him on LinkedIn.