Yes. I said it. And I said it right here on my blog. And I’ll say it again. Equity management is not what it’s cracked out to be and today’s mortgage market bears that out beautifully. Why is this a big deal? Well, because within our industry anyone who does not believe in equity management strategy is considered a dinosaur. The thinking is that equity management is the wave of the future and takes into consideration the evolved mortgage landscape.
To be honest with you, personally and as a mortgage professional, I have never felt comfortable with equity management. The enthusiasm that I hear about equity management reminds me of the “new economy” arguments of the late 1990s. And we all know how those companies turned out don’t we? Pets.com anyone? “Because pets can’t drive”.
In an article at AgentGenius (I’m a guest writer for this national Real Estate blog), I outline four reasons why I think equity management is overrated. Here is a summary of the four reasons:
1. What happens if you mortgage yourself to the hilt and then the real estate market crashes? Oh wait that may have just happened to a few folks.
2. I’ve read surveys which show that a major event happens in a person’s life every three to four years. Now if you’re trapped in a 100% interest only mortgage within a flat real estate market, things don’t look too rosy, do they?
3. It has also been found that people do not stay in a mortgage for more than four years and in a house for more than seven years. I believe the best way to ensure your mobility is equity in your home.
4. Finally, this strategy simply doesn’t work for folks on tight budgets, erratic spending patterns, those with credit card debt etc.
Bottom line is I can’t play dice with the roof over my child’s head. I am confident that I can create wealth without compromising the asset that holds the key to everything about my future. Plain and simple. Irrational? Maybe? But wise? I think so.
Read “Equity Management is Overrated” at AgentGenius.com for my full take.
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on Feb 13th, 2008 at 2:07 pm
Shailesh — In the post on your alternate site you said — 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.
People can debate about the degree to which any particular investor should apply these principles. The practice of equity management isn’t new by any stretch. Is it misused and abused by amateurs and unethical pros? Of course it is. Has it allowed thousands of regular folk the option of early retirement at higher retirement incomes than they thought possible. Absolutely.
‘Within the right context’ says it all.
Thanks for your thoughts so eloquently put into the post.
on Feb 13th, 2008 at 6:25 pm
Jeff,
Thanks for making a very good point. I tried to make that point in all of my comments relating to home equity management. It is very important that consumers are made aware of everything including those elements which many not necessarily figure into a rational analysis such as those I mention.
Thanks!
on Feb 19th, 2008 at 10:28 am
I have a general question about obtaining a mortgage. My fiance and I are looking to purchase a condo. The sale price is 250k. It is appraised at 323k. Is there anyway that we would be able to obtain a mortgage for 300k. We have talked to 2 standard bank lenders who have said no, they are only willing to finance the sale price. Right now the way we see it is if the developer agreed to cut us a check for the surplus, is this even legal or a possibility? Any insight anyone could provide would be helpful.
on Feb 19th, 2008 at 12:19 pm
It is illegal to receive cash back during a purchase transaction. Lenders will only lend on the purchase price or the appraised value (which ever is less). These are standard rules in the mortgage industry (may even be Federal laws – I’m not sure).
on Feb 28th, 2008 at 12:18 pm
[...] few weeks ago I made the claim that equity managent was not what it’s craked out to be. I also wrote a post on AgentGenius.com (a national real estate magazine) that equity management is [...]