5 Reasons Owning a House Isn't as Good as Cash in the Bank
Think you're financially set because you own a house? Think again.
Likely the biggest difference is equity in a house isn't liquid.(courtneyk/Getty Images)
Home ownership is often viewed as part of the American dream. Despite indications that millennials are shunning conventions, the house with the white picket fence continues to be a goal for many people. A 2016 survey by the Pew Research Center found 72 percent of renters would like to buy a house in the future.
"In America, the mindset is you almost feel ashamed if you tell someone you rent," says Kyle Winkfield, managing partner at finance firm O'Dell, Winkfield, Roseman and Shipp in the District of Columbia.
Financial planners say one appeal of home ownership is the opportunity to build equity – or value – in a property. "People need a place to stay," says Ash Exantus, director of financial education at BankMobile. Rather than pay rent for 30 years and have nothing to show for it, mortgage payments can end with a person owning something of value. "That money isn't being flushed down the toilet," Exantus says of how people view mortgage payments compared to rent payments.
However, having equity in a house, even a paid-off house, isn't the same as having cash in the bank. Before rushing to pay off your mortgage, Winkfield suggests considering whether it would be better to put extra money elsewhere instead of toward a mortgage balance. "I like having options," he says, and home equity limits options for the following five reasons.
1. Equity in a house isn't liquid. On paper, having $100,000 in home equity contributes to a person's net worth the same as having $100,000 in a bank account. However, in reality, there is a significant difference between the two. "Cash buys milk, eggs and health care," Winkfield says. "Equity doesn't."
Equity isn't liquid. In other words, it can't be easily converted to cash. Equity can only be accessed if someone takes out a loan against the value of their house or sells the property. "That's the major downfall as opposed to having money in a bank account," Exantus says.
The process of tapping into equity can take time, something you might not have in the event of an emergency. While you can set up home equity lines of credit in advance, those typically aren't guaranteed and can be revoked if the market takes a turn for the worse.
2. You need to ask permission to use equity. Michael Foguth, founder of Foguth Financial Group in Brighton, Michigan, says it can be time-consuming to access equity, and it's also not a sure thing. "Let's say you have $200,000 of equity in your home," he says. "You have to go to the bank and ask for permission to get your own money back." Financial institutions are under no obligation to extend loans based on a property's equity, and they may require applicants to meet a list of requirements.
"If I need my money out of [a house], I need to be duly employed," Winkfield says. That could mean someone in need of cash because of unemployment or an extended illness won't be able to access their equity.
3. You pay interest on the money. Once a homeowner is approved for a home equity loan, interest will need to be paid. "You have to pay someone else an interest rate for your own asset," Foguth says. He uses the example of a $100,000 loan taken out at 4 percent interest. "Every year, it costs you $4,000 to have your own money."
Winkfield argues it's not even really your money if you have to pay to get it. "Interest is for the privilege of using someone else's money," he says.
4. Money in the market could earn more. Paying off a mortgage has long been a goal for many people, but there's no need to hurry in today's low-interest climate. "When your parents had a mortgage, their interest was double digits," Foguth says.
However, average mortgage rates have been below 5 percent since 2010. Meanwhile, the S&P 500 index on the stock market has averaged a 9.8 percent annualized return over the past 90 years. That means many people may come out ahead if they invest money rather than make extra mortgage payments.
"From an interest rate standpoint, the math doesn't make sense," Fogurth says about paying down a mortgage more quickly as opposed to investing money.
5. Housing prices can decline. Property has long been seen as a safe investment, and some people feel more comfortable having their money tied up in a house as opposed to in the stock market. Yet, as the 2008 recession demonstrates, property values don't always go up. "Putting your financial security in one sort of vehicle is a mistake," Exantus says.
Winkfield recommends that you focus on building wealth in bank and investment accounts. Ideally, you will accumulate enough to provide the peace of mind that comes from knowing you can pay off the house with cash at any time. It's not always wise to write a big check to pay off the mortgage. Instead, continue to make regular payments while allowing investments to grow. Eventually, "You'll have it paid off and have equity, but you'll also have money in the bank," Winkfield says.
Financial planners say they know why people want to pay off their mortgage. There is a sense of security that comes from living under a roof that doesn't have a loan attached. Still, there are property taxes to pay and natural disasters can always occur. Savings and investments don't come with those same costs or risks, which means that, in the end, equity might never be as good as cash in the bank.