You Can’t “Take the Cash Out of Your Home and Put It To Use”
This is an unusual kind of post for me. It’s sort of about words and language, so I guess it fits with my general theme here. But it’s really more about economics. Or maybe personal finance. Maybe just math. I don’t care. I need to get this bee out of my bonnet*.
I was flipping through AM radio stations this morning and found myself briefly listening to a local investment advice talk show. I bet your community has one too. It’s run by a mortgage investment company. The hosts are gregarious and obnoxiously optimistic. They talk a lot about helping people create and manage their wealth. Fine. They may be really nice guys and they may really help all kinds of people.
But they are also quite clearly and intentionally deceiving people, which makes me suspicious of everything they say.
Over and over they say things like, “take the cash out of your house” or “put your home equity to use.” They talk about the dangers of “letting your home equity just sit there” when you could be investing it and making money on it.
Listen, I’m not offering investment advice here. I imagine there are lots of situations where it could be wise and profitable to follow the strategies these guys recommend. Do what you think best. But understand what you are really doing.
What these guys call “putting your home equity to use” is really borrowing money from a bank (or some other institution) and using the value of your home as collateral for the loan. If you borrow this money (at interest) and invest it somewhere, you may make more in interest on the investment than you pay on the loan. Perhaps if you do it wisely enough there is a good chance of this. I don’t know. But there is at least some chance that you will not get that return, in which case you will lose money and put your house at risk. Because you have to pay that money back to the bank. It’s their money, not yours. This is what these guys don’t tell you.
Listen. The money they are talking about is already “at work.” It is the value of your home — the place where you eat, sleep, and spend family time. There is no cash sitting around waiting to be used. They are talking about the amount of money your house would be worth if you sold it. Equity is the difference between what you owe on your house and what it would sell for. It’s a hypothetical figure. It’s not “sitting” anywhere. You can’t have it unless you sell your house.
It’s as simple as this: You can have your house or you can have the money that your house is worth. You can’t have both. Don’t trust anyone who tries to tell you different. Even if they are on the radio.
This may come as a shock, but sometimes people use words to deceive you.
*This is a figure of speech. I never wear bonnets.