Is Most of Your Wealth in Your Home Equity?

If most of your wealth is in your home equity, you might want to reconsider your position. As hundreds of thousands of victims of Hurricane Katrina learned, home equity can vanish overnight and through no fault of your own. Even the tired old argument that they should have thought of that before choosing to live in the path of a hurricane is useless because there are natural disasters everywhere. Fire, flood, tornadoes, lightening, "sure thing" investments, outsourcing, and other forms of economic migration all have the potential to destroy everything you have worked for all your life simply by wiping away, or severely diminishing, the equity you have in your home.

Using your home equity to fund other investments is the height of foolishness, no matter how smart the salesman (loan officer, banker, stock broker, etc) makes it sound. Suppose you do use your home equity to fund another investment and something happens - either to the other investment or to your home? What do you do? You could lose the other investment, your home and the ability to purchase another home. This is bad business all the way around.

Suppose you are one of the fortunate ones, and no natural disasters hit your town. However, you wake up one morning and find that the local major employer has moved out of the country, leaving hundreds of families in your area without work. Most will sell out and move on, and the equity in your house will be diminished because of declining economic conditions in your area. If you sell now, you'll barely be able to pay off your current mortgage and put a down-payment on another 30 year mortgage in another area. The result is - stay or go - your home equity "wealth" is gone.