What Should I Do with My Home Equity ?

Q: My wife and I bought our first home a few years ago. The home has gone up in value, so now we have some pretty good equity in our home. What do you think about using our home equity to buy stocks?

A: Congratulations on the timely purchase of your home. I am glad to see that rising home values have given your wealth a solid boost. Many first-time home buyers find themselves in a similar situation. The stock market rally has many of them asking the same question.

A young couple called me with a similar question just a few weeks ago. They are both in their early thirties, have been married for about four years, and have an 18 month-old daughter. Both are doing well in their careers.

Two years ago, with the help of his veteran’s benefits, they bought their first home—a small, older home in a neighborhood that has attracted the younger, artistic set. Suddenly, they find themselves with nearly $100,000 in home equity.

I gave them the same advice I’m going to give you: don’t sell your home to buy stocks.

Their reaction surprised me as much as my advice seemed to surprise them. When I told them what I thought, I was met with stunned silence. For a moment I wondered if my phone had gone dead. Then the husband said, “But I thought you were a stock guy. I was sure you would think it was a good idea.”

I told him that I’m not tied to any particular investment or asset class. My goal is to help people make wise financial decisions. As I see it, parents should nurture their home equity to help secure a solid home life for their family.

The gentleman responded, “But don’t you think I’ll earn a better return on a stock portfolio than I will on my house?” I said I didn’t know. He seemed to have done well on his home investment, but that really wasn’t the point. I said, “This may sound old-fashioned, but it is pretty fundamental: you can live in a house; you can’t live in a stock portfolio.”

I should add that this couple is also making significant annual contributions to their 401k plans. Their retirement portfolio is growing and they have exposure to the equity markets.

There are several things you can do with that home equity to help secure your family’s home life. For example, you can use it to buy a bigger or newer home without significantly increasing your mortgage payment. You can also use it to make needed improvements on your existing home. Or you can leave your home equity alone and simply let it grow.

As you think about what you want to do with your home equity, I hope you will keep in mind this very important principle: Financial planning is about a lot more than return on investment. In fact, return on investment is only one part of a much bigger picture. The best financial plans help us organize our resources so we can live our lives to the fullest, including providing for the security of our loved ones.

 

Steven C. MerrellMBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell,   2340 Garden Road Suite 202, Monterey, CA93940 or email them to steve@montereypw.com.