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January 2007 - Equity on your house is worthless if you are cash-poor

Equity on your house is worthless if you are cash-poor

☳ by Adam Aspilla

Many people envision to pay off their house-mortgage on or before they retire to build up equity (the difference between the value of the house and the mortgage owing against the property).

 

Some of them maximize the pre-payment privilege to pay off the mortgage earlier than the normal amortization period of twenty-five years. However, after they have built up lot of equity many of them do not know what to do with it.

 

Since they do not know what to do with their equity, there are those who have paid or almost paid their mortgage and yet loaded with credit card debts and loans from secondary lenders with exorbitant interest.

Form time to time, I receive calls from people with big equity of their houses asking what to do with their credit card debts and loans because they experience negative cash flow. Some of them are already on default on the regular minimum payments.

 

An example was a retired caller who wanted to consolidate his credit card debts and unsecured loans of about $20,000. I asked, “how much is your monthly income?” he answered, “my monthly retirement income is $1,200.” I asked, “What about the income of your wife?” He responded, “I am a widow.” I further asked, “Do you own a house if so, what is the value of the house and how much is the balance of the mortgage?” He replied, “yes, I own a house valued almost $400,000 and there is no more mortgage.”

 

I suggested to use the equity of his house to get a line of credit or a reverse mortgage (ask your bank the details of it) from his bank to pay off his total debts of $20,000 with high interest rate and have some extra cash to supplement his minimal pension to enjoy his retirement life. He told me that he did not want to get a line of credit or a reverse mortgage using his house as a collateral because it would reduce its equity. His response does not make sense considering his financial circumstance.

 

In building you house equity, the question you should ask is “What is the purpose of building up equity?” There are at least two possible answers to the said question:

 

1) to use the equity when I retire so I could enjoy retirement life

2) to give it as inheritance to my children and love ones when I am gone.

 

If your answer is number one on the above question, you should arrange a line of credit or a reverse mortgage as suggested above.

 

However, if your answer is number two you have to pay off first your debts using the equity of your house, otherwise, you would be hounded by creditors and be sued in court for default payments and it would ultimately attached your house which would diminish its equity through court order. You should realize that your house equity is worthless if you are cash-poor. 

 

Adam Aspilla is a Senior Financial Counselor of the Debt Clinic of Canada Inc. and the author of the book, You Can Negotiate All Your Debts. He also writes a biweekly column, “What Matters In Life” in “Taliba Newspaper. For free initial, professional and confidential consultation, please call 905-306-7572.