Dec. 16, 2005: Make your home's mushrooming value work for you with a Phoenix rental property
If you have owned your home for six months or more and have resisted the impulse to refinance your mortgage, by now you're sitting on a boatload of equity.
How much? A third of the purchase price? Half? The value of your home may actually have doubled in the past 18 months.
Think of it. If you put down $20,000 on a $180,000 home and if your home is now worth $360,000, if you were to sell it you could buy back your original investment, paying off your mortgage, and still have close to $150,000 left over - after closing costs.
Economists call this an unearned increment. You didn't reduce your debt by paying down your loan. You didn't increase the value of your home with sweat equity. All you did was sit back and watch as other people bid up the value of residential real estate.
The trouble with equity is that it is unrealized wealth.
Until you sell or refinance, it's just the promise of future wealth, with no actual increase in wealth today and no added increase in wealth tomorrow.
The worst thing you could do with your accumulated equity is cash it out and blow it on luxury items.
But almost as bad is just sitting on it. You're suddenly swimming in a vast pool of unexpected wealth. It would be a shame to let it stagnate.
Most of us have been carefully trained to be financially timid, so by all means, pursue security first. If you have an adjustable-rate mortgage, refinance to a five- or seven-year fixed/adjustable hybrid, retiring any second mortgages or high-interest debt in the process.
After that, dive into the investment pool.
As you've discovered, there is no better long-term investment than real estate. But even if you don't relish the risks or the hassles of being a landlord, put that equity to work somewhere.
You can continue making your mortgage payments out of your income, but, invested profitably, the windfall of appreciation you have made in the past year will make you even richer in the years ahead.
Greg Swann is the designated broker for BloodhoundRealty.com, a full-service Metropolitan Phoenix real estate brokerage. This article originally appeared in the West Valley regional sections of the Arizona Republic.
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