07 September 2008

Understanding and Ignoring Home Equity

News of Fannie and Freddie. Weekend news is always the most interesting...if you hope to confine the damage of any announcement, you use the weekend schedule of Americans and their news outlets to good advantage. And that's what is happening with the news of government intervention to shore up both Fannie Mae and Freddie Mac.

The mortgage industry will be a bit more stable as the intervention proceeds but the overall result is much the same: housing in America is still in trouble.

For boomers actively buying or selling, the daily swing of events will be important. For boomers not in the housing market, well, we may just want to keep our heads in the sand as long as possible. That's because we are probably much happier not knowing the FMV (fair market value) of our homes today.

As we approach retirement many of us take comfort and even pride in our "home equity." Aside from providing opportunity for loans and lines of credit, home equity just plain makes us feel good. I've always got my equity in my house. We can always sell the house and live on that. And, my personal favorite, it's almost paid for.

But home equity is based on market value minus outstanding mortgage. (If you go shopping for a home equity loan, you factor in 80% to find out what the immediate cash value is.) Most of us walk around on auto-pilot with two figures in our head: what we paid for the home and the outstanding mortgage. That's not quite the same thing as market value minus outstanding mortgage.

If we have the benefit of time (not planning to sell the family home for 5 or 10 more years), we may be able to hold onto our auto-pilot figures and not calculate accurately. Even a net worth statement can keep us on auto-pilot. Only an appraisal will drive home the possibility that our home equity is less a part of our retirement plan than we thought.

On a personal note: If you happen to have a slightly different style of house, market value would have to include the possibility of a long wait for a sale. While geodesic domes are fun to live in and enjoy low energy bills, they do fall into that different category. And when economic times are tight, folks are not so charmed by different. ~ Lida

© 2008 Mary Bold, PhD, CFLE. The content of this blog or related web sites created by Mary Bold (www.marybold.com, www.boldproductions.com, College Intern Blog) is not under any circumstances to be regarded as professional, legal, financial, or medical advice. Or education advice. Or marital advice. Or even a tip.

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