Equity harvesting

Over at CNN Money yesterday I read an article called “Betting your home against Wall Street” by Walter Updegrave. The purpose of the article was to answer this question:

I’ve been hearing a lot about “equity harvesting,” or the practice of taking equity out of my home and investing it the markets. Do you think this is a good idea? What are the pros and cons? – Rich, Tampa, Florida

Updegrave analyzes this question well, and very objectively, so read his article first. He points out that although financial ‘experts’ are very fond of the “10-percent return from the market historically” phrase, $100,000 invested in a NASDAQ index fund in 2000 would be worth $66,000 today. The market is full of risk, and I think too often people forget that. You can look at long-term returns but the reality is that if you suddenly get laid off or have health problems, you don’t want that money stuck out in the market at $66,000 when you have a home equity debt of $100,000 +.

I wish Updegrave had started his response with “First of all, this is a bad idea.” Your home equity shouldn’t ever be considered part of your investment portfolio. You need a place to live, and it’s unlikely that if you find out that your equity was squandered on pets.com stock that you can easily “cash out” your house and get a similar one in the same area for less money.

When we bought our house we took out a home equity loan, simply because interest rates were so low at the time it seemed silly to cash out the equivalent amount in stocks. But as soon as the rates started creeping up on our adjustable-rate loan, we cashed out a couple of stocks and paid it off, and to be honest I wish we had done it sooner. I still think that being debt-free is a cornerstone of relaxed finances.

I wish I could pay off my mortgage in one huge swoop, but I don’t want to sell off hundreds of thousands of dollars of stocks, empty my emergency fund, withdraw from our IRAs and pay a big capital gains tax next year; plus losing the tax deduction on mortgage interest. But if I get to a position where I have enough available money in easily liquidated investments to pay it off, I will. Even though there would still be expenses – maintenance, property taxes, etc. – I can’t imagine a better feeling than having absolutely no debt of any kind. I’m certainly not going to increase my debt just so I can maybe make a little bit of extra money in the long term, at the risk of jeopardizing my house.