Recently I was interviewed for a real life investing series on Money.

I’ve been asked to keep up with some blog posts on their website and this topic came up from a question on the discussion board over there. I answered it there, and I figured I’d share it with you here too.

Home Equity

When do you think it’s smart to pull equity out of your home, and how much is too much?

My question is why pull out your home equity at all? If you want to pull out equity to buy toys or supplement your lifestyle, I say, NEVER is the best time! [not in the reply but…I’ve seen a lot of situations where owners got WAY OVER THEIR HEADS tapping into home equity like it’s an ATM for buying crap like ATV’s, Jet Skis, or even paying off credit cards that have been racked up on similarly useless novelties that go down in value. Many were short sales waiting to happen or already have been foreclosed on because the owner who should have been in a safe payment with a ton of equity from longer term ownership, but they blew it on lifestyle crap. Read “The Richest Man In Babylon” and “The Millionaire Next Door” for real traits of the wealth.] If you want to use some of your home equity to get you into another real estate investment, then I would say let’s talk…

First things first; I don’t think you should refinance your existing first mortgage which would start your amortization back to 30 years. If you are going to refinance NOW to take advantage of super low interest rates, great, but I would try to shorten your amortization and keep the same payment you’ve been making. For instance, if you have had your loan 5 years and you are currently at 6% but can drop it to 4.5% by refinancing, consider a shorter term mortgage – like a 15 or 20 year mortgage if available…sometimes rates are even better for shorter terms.

If you have equity on top of the existing loan balance, I would use home equity line of credit. I would have a very specific plan on what you’ll do with the money. My opinion on use of Home Equity Lines of Credit is to use it only on quick turn deals. For instance, you purchase a bank foreclosure for 50% of the after repaired value and you can fund the purchase with a hard money loan, but you need say $20,000 to rehab it and cover your holding expenses. Within 3-6 months the house is fixed, marketed and sold. You get a profit on the resale, you pay off the hard money loan and you pay down the Home Equity Lines of Credit to repeat the process. Let me state….get the right education before you do any real estate deal like that. You need to know the conditions in your marketplace and go at it well educated and well thought out before you go risking your home equity.

A good plan might be to fix and flip 2-3 houses and use part of the profits toward buying a good long term investment property and use the rest to build cash reserves and pay down your 1st mortgage.

Michael Jake

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