Our advisor says we have ‘too much’ real estate equity. What should we do?

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The Credible Money Coach weighs in on whether there is such a thing as “too much home equity.” (Credible)

Dear Credible Money Coach,

Our financial broker recently told us that we have “too much equity” in our main home and a rental home, and that we should put it to work. Our house has a $315,000 mortgage worth $1.1 million that will be paid off in nine years. Our rental has a $42,000 mortgage with a value of $390,000 scheduled to be paid off in four years.

My wife and I are 53 years old, plan to retire in six years, and have significant retirement accounts currently in excess of $2.5 million. We are fine with using the extra rental income to supplement our retirement and like the idea of ​​not taking out a mortgage until retirement. We have about a third of our retirement funds in Roth accounts. We also carry $1 million personal liability insurance.

So is it “bad/wrong” to have so much equity in our real estate? – John

Hi John, and wow! If it’s wrong to have “too much equity” in your financial situation, I don’t want to be right. Congratulations on having firm control over your finances and a solid financial foundation to live well in retirement.

Your financial broker may be looking at just a brushstroke in your overall financial picture. They’re looking at all the equity you have in property and thinking they could make that money work harder for you by investing it. They may want you to consider a cash-out refinance so you can tap into that capital and put it to work elsewhere.

Investing is one of the many reasons people do cash-out refinances. And if you’re considering a cash-out refinance, you should definitely comparison shop with a resource like Credible, which makes it easy to view pre-qualified refinance rates from multiple lenders.

Investing can be a great way to increase wealth, but the growth trade-off is an unavoidable risk. therefore touch fair housing investing is not suitable for everyone. Let’s look at some important questions to consider if you’re considering following your broker’s advice.

What is your current financial situation?

John, from your description, you’re in pretty good shape right now. Let’s list the advantages of it:

  • Two properties to be liquidated in the foreseeable future (barring a financial crisis)
  • Substantial equity in two properties
  • Reliable rental income from a property
  • More than $2.5 million in retirement accounts
  • $1 million in liability insurance (although you might consider increasing that amount given your assets)

Your financial situation currently seems secure. You probably won’t have a hard time paying your bills, meeting 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 that said, based on your current assets and real estate debt, it looks like you’re on track to meet your goal of retiring in six years. And if you continue to contribute to his retirement accounts, his savings will continue to grow to an amount that should be enough to meet his needs (and a few more) in retirement, barring an unpredictable financial crisis.

What is your risk tolerance level?

This is really a key question for you, John. You say you like the idea of ​​entering retirement without any mortgage debt, and I’m definitely in favor of being mortgage-free in your Golden Years. home equity it’s like money in the bank (minus maintenance fees). You may need that money in retirement for important purposes, like modifying your home so you can age in place.

Compared to investing, retaining your home equity involves much less risk. One reason for this is that the market influences that have the greatest impact on the value of your home (and by association, your equity) tend to be less volatile than those that affect the value of stocks. For example, the war in Ukraine has created significant turbulence in stock markets around the world, but has not affected home values ​​in the US. So while your Roth IRA balance may have lost a few digits, your home has held its value.

Of course, there is a trade-off between choosing to retain home equity rather than cashing in and investing it. Stocks can, in good times, generate returns that exceed the appreciation you’re likely to see in your home’s value between now and retirement.

What will you gain from a cash-out refinance to invest (and do you really need it)?

TO cash-out refinancing It can be a cost-effective way to finance important goals, like repairing or renovating your home, which can improve your home’s long-term value. But some reasons to tap into home equity are less reliable than others, and investing falls into that category.

Before you follow your broker’s advice and convert your cash home equity to finance investmentsIt is important to ask yourself these questions:

  • Do you really need the extra growth you’re hoping to get?
  • Can you meet your retirement goals without risking your valuable home equity?
  • Are you comfortable risking your home equity for unpredictable returns?
  • If you withdraw your capital to invest it, do you have time to recover if your investments lose value?

Ultimately, only you can decide if you prefer the security of retaining your home’s equity over the potential higher returns you earn through investing.

Ready to learn more? Check out these articles…

Need Credible® advice for a money-related question? Email our credible money coaches at moneyexpert@credible.com. A Money Coach could answer his question in an upcoming column.

This article is for general informational and entertainment purposes. The use of this website does not create a professional-client relationship. Any information found on or derived from this website should not be a substitute for and cannot be relied upon as legal, tax, real estate, financial, risk management or other professional advice. If you require any advice, please consult a licensed or knowledgeable professional before taking any action.


About the Author: Dan Roccato is a clinical professor of finance at the University of San Diego School of Business, Credible Money Coach personal finance expert, published author, and entrepreneur. He held leadership positions at Merrill Lynch and Morgan Stanley. He is a leading expert in personal finance, global securities services and corporate stock options. You can find it in LinkedIn.

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