There can be many reasons homeowners aspire to have their home paid for. They can include no mortgage payments, financial security, debt reduction, lower expenses, retirement planning, financial freedom, legacy planning, no risk of foreclosure, and reduced stress, just to name a few.
All those things have a cost attached to them which is the loss of the earning power which is tied up in an asset that only benefits the owner by appreciation. In the past few years since the pandemic began, homeowners have experienced a dramatic increase in equity due to appreciation.
As an example, let's set up a comparison of how the yield on equity decreases as the property appreciates. A homeowner has a debt-free home worth $400,000 that is expected to appreciate at 4% a year for the next five years. The future value of the home would be $486,661 and the owner would have earned a 4% return on his investment in the property.
In scenario #2, the homeowner refinances the property today for 80% of its value at 7% interest for 30-years. At the end of the five years, the property is still worth $486,661 and his unpaid balance on the mortgage would be $338,874. The $80,000 equity would have grown to $147,787 earning him an annual return on investment of 13.06%. The leverage of the borrowed funds caused the owner in this example to triple his yield.
Let's not forget the $320,000 cash out that the owner received when he refinanced the home. If that was invested in rental real estate, he may be able to buy three to four more properties with 80% mortgages and increase his yield even more.
There is a lot more to a total analysis of a situation like this because rental properties have income and tax advantages that are not relative to a principal residence. What is possible for the homeowner with this type of asset in their home, is to free up a major portion of the cash and reinvest it.
Having equity gives a homeowner many benefits including financial freedom and security, peace of mind, and the option to pull money out, tax free, to invest in rental property to increase their wealth position.
To learn more about rental property, download our Rental Income Properties and then, schedule a time when we can get together to explore options. We can start with a Home Equity Review to see what kind of funds may be available based on the current value of your home and its unpaid balance and then talk about how rental property could help you with your financial goals.
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Kim Billings
214-794-9738