I just saw a blurp on a strong earthquake (5.8 on the Richter Scale) that even shook Las Vegas a little. While reports of damage are not yet coming in and the epicenter 29 miles outside Los Angeles in Chino Hills, CA, it deserves taking a look at the potential of lost “trapped” equity from earthquakes.
Many think that there is no risk in paying off your mortgage, but reality is quite a bit different. Everything that you do carries risk, some more than others and any money you send to pay off your mortgage is money you may never see again, especially if your house gets damaged or destroyed.
Without having a solid emergency fund in place, plenty of cash on hand or at least quickly accessible, you could face financial ruin even if your home is fully insured. DO NOT get caught in the wrongful thinking that a HELOC provides “liquidity.” HELOCs are usually frozen when a disaster hits, so in this case, those lenders who still do HELOCs are likely halting withdrawals for those homes anywhere near the quake.
Why would you face losing equity if your home his hit by a disaster when insured?
Earthquakes, fires, hurricanes (wind damage only), tornadoes and other tragic events can render a home uninhabitable. If that is the case, then you will have to carry two housing payments monthly on top of the deductible. You may get a few months free of your mortgage payment, but then the lender will be asking for their money again.
Since homes in disaster areas take a long time to repair or rebuild, sometimes years, you could be carrying two housing payments for a long time or face foreclosure. Just look at foreclosure rates after a disaster hits and you can see that many families are ill prepared.
What happens to the equity in these homes?
Very simple, it’s gone. So much for all that money paying off your mortgage being “safe”, or even smart.
What can you do?
Build a solid, truly liquid, emergency fund. If you cannot do that quickly enough, a cash out refinance may provide that ability. Yes, this is one way you can use your mortgage as a financial tool.
Don’t take me wrong, I am not advocating taking out too large a loan, rather providing an option that can save you from financial disaster.
Don’t believe me? Just ask yourself if you faced a major financial disaster right now, even if it isn’t the loss of your home, would you rather have $100,000 trapped in your home and little or no money available, or would you rather have that $100,000 in a safe side account that you can use to live on for years?
Money Merge Accounts and other mortgage acceleration programs advise you to “trap” your money in the walls of your home. I have already shown they aren’t worth their money in the first place, this is just another problem I have with them. Their agents will sell the HELOC as a “liquid account” which is far from real in these situations (and many others), so don’t fall prey to their sales pitch.
Should you do a cash-out refinance to improve your financial health? Quite possibly, yes. Be careful though. First, not everyone should do this as it depends on your situation. Second, many mortgage professionals are not educated enough to set you up properly nor advise properly either. Contact me if you would like to hear whom I recommend.
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