Is Your Home Equity Optimized?
Home equity has been unreliable recent years. Too many used home equity as an ATM, and the real estate downturn has left many realizing the folly of their ways with homes worth less than their mortgage.
However while most of the visitors to this site have significant equity or paid off homes, most are only considering their homes as an asset to be utilized far in the future when they downsize.
I’d like to propose another way of using your home today, and capitalizing on the unbelievably low interest rates in the home mortgage market.
For many people with good credit, home loans can be obtained in the 3% to 4.5% range. It doesn’t really take a rocket scientist to realize that investing money borrowed at 3.5% into a new investment yielding 5 to 6% is a good deal.
Consider these four current offers (as of 8/2/12): each one offers a solid cash flow, as well as lump sums. Depending on how much money you borrow from your home, the income stream can be used to pay your mortgage, even pay it off. This leaves you a lump sum that matures in the future as essentially free money.
The Genworth case is a perfect example. It pays $4800/ month for 306 months, then pays $550,000 lump sum. At 4% interest, you could borrow $1,005,413 on a 30 year home mortgage with payments of $4800/ month. Theoretically, you could borrow the entire purchase price of $922,969, pay the mortgage off with the income stream, and be left with $550,000 at the end of the term.
Now, jumbo mortgage rates, your risk tolerance, and other factors may make this specific amount of borrowing not advisable. But let’s say you have $550,000 to invest, and a paid off home worth $1M. You could easily borrow $400,000, and rates on 15 year mortgages are as low as 3.5%. The payment on this is 15 year mortgage is just $2860 per month.
Then, combine your mortgage proceeds and your available cash to purchase the $922,969 Genworth case yielding 5.5% over 28 years. Utilize $2800 of the monthly income from Genworth for your mortgage payment, you are still left with $2000 month of income for the first 15 years. Your house is paid off after 15 years, and your income from Genworth jumps to $4800 a month for another 10.5 years. As a super bonus, you also have a $550,000 lump sum windfall- your entire invested principal is returned in full, and meanwhile your enjoyed 15 years of $2000/ mo and 10.5 years of $4800/mo. That is a superb investment.
Utilizing home-equity in this way is very safe, as your mortgage payment is directly offset by your new income source, and the investment that you make yields a higher rate of return than your debt costs you. There are home mortgage interest tax deductions to take into consideration as well that may make this even better. For retirement investors looking to safely utilize home-equity, a strategy like the one described above is hard to beat.
It just so happens that we currently have four similar cases to the Genworth case that all would suit this strategy. Each includes significant income streams and a lump sums. For investors with home-equity, you owe it to yourself to make lemonade out of this lemon of a low rate environment.
Don’t let these low rates go to waste. Grab some cheap mortgage money, and give us a call to secure one of these fantastic income with lump sum Secondary Market Annuities. In most cases, we can make arrangements to hold cases while your refinance is processing.