Don’t ever, ever lose your job!That’s right, it’s not your credit score or your assets or your equity or even Location, Location, Location that matter
most, it is whether or not you have an income stream capable of supporting your mortgage. Most people think of their home as safest of investments that they have. It can be but only if you manage it correctly. If you have equity in your home, you are subject to risk of loss of that equity at any time you can no longer afford to make your payments. It doesn’t matter how many years you have paid perfectly, if you for some reason can’t, bank will not let you slide for a few months to be nice. As a matter of fact, more equity you have more attractive it is to them to foreclose on you. That to me is exact opposite of a safe investment!
I counsel my clients to understand that most important thing they want to maintain is liquidity. They want to have access to enough cash or near cash reserves that they are in charge or their financial choices.
This may not seem like a revolutionary idea but I would argue it is something that a great many people do very poorly. My clients are above average as far as wealth in their socio-economic groups. They tend to have more wealth per average income or job position than their peers. And most if not all of them have less than 5% equity in their homes!
There are many factors that contribute to wealth and putting your home equity to work isn’t magic criterion that assures you will be wealthy. But consider why these people are positioned this way and maybe connection will become clear. In addition to liquidity, other benefits include increased safety, rate of return, tax savings, elimination of non preferred debt and establishing an emergency side or reserve fund.
How does all of this relate to income? Consider that if you lose your income you lose ability to get access to equity in your home. And guess when most people need access to that money most? You guessed it, when something unexpectedly affects their income stream, like a job loss. Lenders will make loans to someone with bad credit, with no assets or reserves and with limited time in a certain field of work but if you don’t have ability to pay them back when you lose your job, they generally don’t want to lend you money!
