The Expert Podcast

Besides being a roof over your head, a place for you to sleep, and a place to raise a family, how can a home be more of a strategic life event savior than just four walls and a roof? Well, as we talked about before, owning a home can be a valuable, crucial, sometimes life or death investment in your future. It's an article that was in the Motley Fool titled "Your Home Can Come to Your Rescue," and we're not talking about just protecting you from rain. It can do a few things, and let's take a look at what a home can do to save or improve your life or prevent financial disaster—again, more than just having four walls and a roof.

First of all, if you own a home with a mortgage, you are prevented from being evicted from an apartment because the owner decided they don't want to rent the house anymore or you're prevented from having a large rent increase. We've seen rent increases in the last year and a half of hundreds of dollars, sometimes over a thousand dollars. People that were paying 14–1500 are now paying 2500. What would happen if your monthly housing expense went up by 500 a month, 600 a month? What would that do to your budget? What would that do to investments in retirement, maybe kids going to school, maybe proper nutrition, maybe healthcare? That 600 a month is 7,000 a year. With interest, in five years you could be talking a hundred thousand dollars in personal net worth because your rent went up 500 bucks if you compound it out. Owning a home gives you a monthly payment that's fixed—it never goes up.

So that could affect your future. In addition, you have the safety and security of knowing that you can plan for where you're going to live—your schools, your social life, your employment are all based on where you live. If your landlord decided they don't want to rent the home anymore or jack up the rate and you have to move, you might have to pull your kids out of school and put them in another school. If you can't find another place suitable near where you live now, you might have to take another job if your new house, your new home, is two hours away. You may not be involved with the same friends. You may not develop the same deep social connections. With a home, you're also probably more distant from neighbors. You know, apartments are wall-to-wall with neighbors, condos are wall-to-wall. Even rental homes are more likely to be closer in proximity to the house next door than homes that are owned by the resident.

Look at this house—see the space in between the houses? When's the last time you saw a rental home like that? Most houses that are for rent are in neighborhoods where the houses are closer together. How does that make a difference? Well, with a little more elbow room, you can have more autonomy in your life. You can do things, say things, act in a way that's a little more personal to you where you don't have to always be looking over your shoulder at what your neighbor's doing. Certainly, this house here—there are neighbors that know who you are and they see you walking in your yard, but it's less intrusive than having somebody breathing down your neck. How does that affect your life? Well, those things can be emotionally and psychologically beneficial. If you have your own autonomy, you can live your own life and be your own person.

Let's talk about preventing other negatives. Let's say worst-case scenario, you have some crisis in your life—a financial crisis. Let's say you lose your job, have a large expense come up, a medical expense maybe, or a personal financial challenge. If you're a homeowner, even if you just bought your house recently, you're more than likely going to be able to take out a home equity loan against your house. Now, you don't want to do this arbitrarily just to buy a new boat, but your home now becomes like an emergency fund. If you've run out of all your other money and it's between life and death of having ten thousand dollars to bail somebody out of jail, fix a transmission on your car, or fly somewhere to see a relative that's dying—whatever it is—you have that option. Now, you're going to have to pay it back and it's going to cost you money with interest, but at least you have the option. Somebody in an apartment doesn't have the option of doing that. Whatever money they have, they have. In fact, when you buy an apartment, any extra cash you do have goes to your move-in expense—first payment, security, last payment, right? Your down payment on your house that you come up with is probably going to be a little more in dollars than your move-in expenses.

Look, if you have an apartment that is 1500 a month and you have to come up with first, last, and security, maybe it's going to be five grand total. If you buy a house, even a two-hundred-thousand-dollar house at five percent down, you might have to come up with 10 grand. So it's going to be more money. However, that 10,000 is in your personal financial wealth statement. It's in the house. It's paid as a down payment. It reduces your loan, and it gives you equity. The money you pay to the landlord is just gone. It goes away. Technically, your security deposit, someday you may get it back, but you know as well as I do, you've moved out of apartments enough times to know that you're not going to get it all back. They're going to find ways to keep part of it. Plus, you don't make any interest on it—just free money for the landlord.

What about your long-term wealth? Well, of course, the big thing we know is homes build equity. Even with very modest inflation and home value increases, homes are worth more over time, and that value increase gives you equity. Now, you can't use that equity unless you sell your house, which means you have to buy another one, or if you borrow against it, which means you have to pay interest. So it's not something that's liquid that you can use every day, but in the long-term benefits of your life, that equity gives you value. Even if it's just you want to live for the rest of your life in that house, at some point your home is paid off. Twenty years later, thirty years later, you live for free. You have no rent. You have no mortgage. That's where your equity is an investment.

So, as this article said, a home can come to your rescue. In fact, the headline is even more provocative. The headline says that being a homeowner could get you through a recession, which presumably we're going to have. How could it? Whether you're a regular homeowner or an investor, home values are rising, and they talk about home equity loan. If you're sitting on a lot of equity, one move you may want to make is apply for a home equity line of credit (HELOC). A HELOC is different than a second mortgage. A HELOC is a line of credit that sits there. You're not really paying interest on it until you use it. You might have to pay a small maintenance fee every month, but the HELOC is sitting there in case you have an emergency. You can tap it instantly. You don't have to apply for a new mortgage, go through the underwriting process—you already have that HELOC, and you could use it for an emergency. Again, last resort, once you use it, now you're taking that emergency and putting it on your house. You don't want to take that lightly because once you take that emergency expense and put it on your house, now your home is in jeopardy until you pay it back. Because now you have a loan, but it is an option that you have where a renter doesn't have. They could get kicked out of their house—not only did they not have the equity, but now if they don't have the money, they are homeless. If you live in an apartment with a 1500 rent, you lose your job, you have no money in the bank, now you're homeless, you're living on the street. If you're a homeowner with a 1500 mortgage, you lose your job and you have a HELOC, maybe you can borrow twenty thousand dollars from your HELOC. That could last you six or eight months until you find another job, right? So there's advantages. Again, you don't want to take it lightly, but there are advantages of having that homeowner status credential.

You might say, "Well, how do I get a 1500 mortgage?" Well, even at five or six percent interest, you can buy a 200–250,000-dollar house and have a mortgage of about 1500 dollars. You might say, "Well, houses are more than two hundred thousand." Many houses are more than two hundred thousand. In fact, most houses are more than two hundred thousand. However, there are plenty of houses that are two hundred thousand. You've seen them on our channel. We feature it every week—four or five or six homes all over the country that are two hundred thousand. We're not talking about derelict, broken-down houses. They're livable. Do they have new carpet? Probably not. They maybe need some paint, probably do, but you could live in them from day one and do those things using sweat equity. Or over time, as you accumulate 4–500 dollars for maybe some new shutters, you put those on. You save up a few hundred dollars for maybe a new door, you put that on. You can build that up over time. And the extra time you normally sit around playing video games or playing golf because you're a renter and there's no point in working on your house because it's not your house, now you can put your time into your house. You can invest your time into landscaping, painting, upgrading your house, which will give you more equity as well.