Friday, February 4, 2005

If You're Going To Cash Out Invest Something

I read an article this week that attributed the borrowing frenzy of the early 2000's to low interent rates. But the key condition that drove this borrowing frenzy was that Fed policy had pushed the rates for new mortgages substantially below the rates of existing mortgages, making refinancing highly attractive.

That said refinancing accounted for over 50% of mortgage applications from 2001 to 2003.

Freddie Mac, said that "cash out" transactions accounted for about 50% of refinancing activity in 2001. That's a lot of cash!

Interestingly many homeowners seeking cash were refinancing with little rate incentive. These characteriscally took out much larger loans. Their main incentive seemed to be tapping into their equity for the purpose of debt consolidation. That's all fine and good. Or was it?

Sure should have to watch there debt appreciates faster than their home. Slay the dragon before it completely consumes you only seems to make sense. But when borrowing for the purpose of getting cash out one should also think in terms of creating a vehicle that brings in a steady return on the very dollar borrowed.

If you must borrow against your house which is a risk in itself, by all means make some of that cash work for you. Here are some ideas.

1. Invest in real estate property (get the grants - tax advantages and all the perks to go)

2. Start a simple but lucrative small business (low overhead essential)

3. Invest in your education - get another degree or some form of certification

4. Invest in stocks - (buy low sell high)

5. Remember that many forms of investment and self improvement come with tax deduction advantages.

That said when the chips are down and you need to draw from a second income to pay a bill or save your house... Boom! Your ready and able.