Sharon Clark and her husband Don bought their second home in 2001 for $225,000. This past spring they decided to sell their home and build a new custom home. They will be moving into their new home just in time for the family to come over for Thanksgiving dinner. Sharon and Don are like a lot of us; they work hard, watch their money and try to make the best investments possible.

The Clarks made a 20 percent down payment on their second home. The money came from the proceeds of their first house. That $45,000 not only lowered the loan amount to $180,000, it also lowered their monthly payment and the total amount of interest they would repay. The home they are selling is now worth $273,500! Don and Sharon are looking forward to using the $93,500 of equity to move into their new home.

The cost of their new custom home is $417,000. They will put 20 percent or $83,400 down and that will leave them a loan of $333,600.

This is the house they will retire in. But that’s 20 years down the road. In the meantime, they will anxiously watch their equity grow.

Don calls his home his best investment. And he says the equity he has built shows a better return than any of his other investments.

Unfortunately what Don calls a return is nothing more than value appreciation. The difference in terminology doesn’t make the $93,000 any less real, but every homeowner should understand that equity left inside their home does not have a rate of return.

Equity is the difference between what was paid for the home and what the home is worth in today’s market.

For the past several years, we have lived in a housing market that is favorable for growing home equity. But should this housing market turn and house values begin to drop, any equity left inside your home will begin to disappear. I call this trapped home equity, and it has no rate of return!

While it’s true that over the long haul the housing market has been kind to equity left inside the home, it should be noted that many homeowners are choosing to remove this money and place it in a fund that actually does have a rate of return.

They have discovered that the value of their home grows whether or not they leave the equity in it or remove it for investment purposes.

The Sheffield’s came to me wanting to refinance their $255,000 home and pull out all of their equity. They had worked out a plan with their financial planner to invest this money ($30,000) in a side fund with tax benefits.

They were able to move this money without paying any taxes and their investment will grow tax free.

But what about the value of their home? They’re not worried. They know that as long as the housing market is friendly toward growing equity, their house will continue to increase in value. This is true whether or not the equity remained in their home or was invested in a side fund.

Now their home equity is protected from market volatility and it is earning a nice rate of return.

OK, but isn’t their new mortgage payment higher now that they’ve refinanced for the full value of their home? No. The Sheffield’s pulled out the $30,000 of equity and took out an interest only mortgage. Their monthly payment remained the same and in the next 10 years the money they invested will grow to $53,725.

If the housing market remains favorable for growing equity (which all indications are that it will), in the next 10 years the value of their home will grow from $255,000 to $342,700.

This will provide the Sheffield’s with an additional $87,700 of equity that they can add to their side fund investment.

During the past three weeks we’ve looked at home equity from a different viewpoint and discovered that home equity is not safe when left inside the home; it is not always easily accessible, especially when you’re injured and need it; and it has no rate of return.

Your home remains one of the best investments you’ll ever make. But care should be taken with the equity to make certain that it is safe, that it remains accessible and that it shows a verifiable rate of return.

(Trey Bowden is a licensed mortgage planner with Spurr Mortgage of Edmond. Contact him at 348-9919 or trey@spurrmortgage.com.)

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