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The Shocking Truth about Your Home Equity

  May 8, 2024  |    #Eliminate Debt

The truth about home equity

Reality check: what you’ve been told about home equity might not align with the truth. Our mission is to provide a much-needed adjustment by unveiling the real story behind home equity. Don’t miss out on this eye-opening opportunity to gain a deeper understanding of your financial foundation.

The truth about home equity isn’t what you think

Ah, the great housing circus of ’08! Back then, “irrational exuberance” wasn’t just a term; it was practically a lifestyle choice. Suddenly, bricks and mortar seemed more valuable than gold bars. Midday TV was like a crash course in DIY house flipping, and even Grandma was eyeing up her tool belt like she was Bob Vila in pearls.

But let’s talk turkey—most of those “renovations” were about as inspiring as a beige paint swatch. Yet somehow, slapping on some color, a couple of doors, and the same old granite countertops had folks making bank faster than a Wall Street tycoon on a good day.

And oh, the loans! Pre-qualification was easier to get than a coupon at Macy’s clearance sale. Recent grads with a starting salary could snag mortgages big enough to make their parents’ eyes water. It was a real estate free-for-all, with everyone from agents to bankers to your neighbor’s dog cashing in like they’d struck oil in the backyard.

In this wild ride of perpetual optimism, if you bought a house you couldn’t afford, no worries! Just wait six months, pull out the equity, and trade up like Monopoly money. Spoiler alert: it didn’t quite work out that way. But hey, everyone thought they were the real estate kingpin until reality came knocking louder than a DIY enthusiast with a sledgehammer.

A bank owns your home

Real estate is where the only guaranteed winner is the house itself. But hold your applause, because it’s not the builder, the buyer, or even the person meticulously watering those front-yard flowers who holds the crown. Nope, it’s the title holder, and more often than not, that’s Mr. Bank with a mortgage to match.

Sure, you might have tossed in a hefty down payment and spent a decade making payments, but let’s not kid ourselves – until that last penny is paid, your house is essentially on loan from the financial overlords. It’s like going into a business venture where you get to negotiate your ownership share, except in this case, the bank usually calls the shots.

So, how much of your castle do you really own? Well, if you got swept up in the “buy now, worry later” frenzy of the mid-2000s with a loan that felt more like a magic trick, chances are it’s closer to a sliver than a slice. Fact: until that mortgage is vanquished, you’re basically a long-term house-sitter with a hefty debt and a dream.

The equity isn’t yours, either

Let’s tackle this conundrum with a sprinkle of humor, shall we?

Picture this: you’ve forked out a chunk of change for your dream home, but wait – why does it feel like you’re renting it from the bank, complete with a “usage fee” every time you tap into your equity? Last time we checked, your car didn’t demand a fee every time you hit the gas pedal, did it?

And let’s not even get started on the baffling logic of borrowing back what you supposedly own. Want to spruce up the bathroom or send Junior off to college? Cue the bank, the ultimate middleman in this comedy of homeownership errors.

Sure, you might think you’re sitting on a goldmine of equity, but here’s the kicker: until the bank gets its cut, you’re basically the sidekick in your own homeownership saga. Ever wonder why the bank doesn’t send you a shiny title when you become the bigger shareholder? Spoiler alert: it’s all part of their master plan to keep you on the hook until that mortgage is history.

But hey, let’s crunch some numbers for laughs! Say you’re in the mortgage game for a $150,000 house, with the bank taking a leap of faith and loaning you 97%. Fast forward four years, and your equity dance has you owning roughly 8% of the house – enough to buy you, well, not much more than a fancy dinner for two.

What’s the truth about home equity?

First, we’re not here to rain on your homeownership parade—your house isn’t worthless, but let’s face it, it’s not exactly a money-printing machine either. Our goal? To help you see your four walls through a money-savvy lens so you can dodge financial pitfalls like a pro.

So, without further ado, here are three tips to transform you into the Sherlock Holmes of real estate finance:

  1. Keep it Real: Sure, the bank might flash some big numbers in your face, but just because they say you can afford a mansion doesn’t mean you should trade your soul for a hefty mortgage. Stick to the golden rule: don’t splurge on a house worth more than three times your household income. Trust us, your future self will thank you.
  2. Cash is King (or at least 20% of the Crown): Want to cozy up with a lower interest rate and skip the PMI party? Slap down a juicy 20% of the house price as your down payment. Not only does it make you look like a more attractive catch to the bank, but it also saves you from shelling out for Private Mortgage Insurance – a win-win situation if we’ve ever seen one.
  3. Play the Mortgage Game Like a Boss: Take a page from our playbook and start playing the mortgage game like a pro. Throw extra cash at your mortgage principal whenever you can, whether it’s from a sudden windfall or a monthly bonus. And hey, why stop at 12 payments a year when you can sneak in lucky number 13 by aligning your extra payments with your paycheck schedule?

Remember, homeownership is like a rollercoaster ride – exhilarating, with a side of queasiness if you’re not careful. Until you’ve paid off that mortgage in full, the bank’s holding the reins. So saddle up, take control, and ride into the sunset of financial freedom like the savvy homeowner you were born to be.

What’s your take home?

In conclusion, the truth about home equity might not be the fairy tale we’ve been led to believe. But fear not, for armed with this newfound knowledge, you’re better equipped to navigate the twists and turns of real estate finance like a seasoned pro.

So, as you embark on your homeownership journey, remember these golden rules: keep it real by sticking to a house within your means, crown yourself king (or queen) by stashing away that 20% down payment, and play the mortgage game with finesse, making those extra payments count like a boss.

Yes, homeownership has its ups and downs, but with a dash of humor and a solid financial plan, you can turn your house into a true home – one where you’re not just a guest, but the rightful owner of your financial destiny. Here’s to unlocking the door to your dreams and riding off into the sunset of financial freedom. Cheers to you, savvy homeowner

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2 responses to “The Shocking Truth about Your Home Equity

  1. While I fully agree with the idea behind ‘don’t buy a house worth more than 3 times your salary’….what would you say to those who live in areas where there are no houses in such a range. I live in a town of 100,000 in southern ontario and our house prices are starting at 300K. The only houses under are at about 250, and need 50 K of work min. So does one just continue to rent while others make the money and their portion of the equity off of my payments each month?

    1. You are absolutely right. Not everyone is swiming in the same water. I have two questions, what kind of living conditions do you really need and how flexible are you? The response here is much more than what we have space for and a good follow up article, but here are a few thoughts. 1. Every market has the undesirables, can you buy one of those and fix it up to a “livable” state so you can then save for the home you truly want? 2. Can you downsize your current renting situation so that you can bank a much larger down payment (this has a huge impact on what you can afford) since 3x your salary is a general rule? 3. Maybe Ontario is not the right choice for you? We know someone who downsized and moved to a house in another town so that she and her husband could invest more heavily towards their retirement. It wasn’t an easy choice, but looking back it was the right one.

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