Broker Check

Do You Want to Own That House or Do You Want The Bank To Own It?

January 31, 2017
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What comes to mind when you think of protecting your house from natural disasters such as hurricanes or floods? Most would rely on their homeowner’s insurance or flood insurance to keep them comfortable and make them whole; that’s what we pay for. If the house pictured above was yours, your insurance company would indeed pay to have it repaired and they would indeed provide you with living assistance while progress is made.

Keep in mind, everyone else in your community who also lost their house will be in the same boat as you – chasing further and further away available hotel rooms within their benefits budget or limited per diem amount. The living assistance you’re receiving is likely to translate into a standard room at a Motel 6 where they can find space.

In theory, this cushion is a comfort but combined the sudden overwhelming demand for contractors the repairs are likely to stretch over months deflating your initial appreciation and confidence in your preparedness. For most of us, it will be awhile before you are back living in your house and cooking your own meals.

Unless you can afford to rent one of the homes left on the market or walk away from the shell of your home the coverage of home & flood insurance simply doesn’t measure up.

Facing this discomfort as a family in the wake of disaster can lead to emotional financial decisions. For example, tapping retirement accounts to boost daily quality of life, cover basics not provided for by insurance, and trying to recapture the sense of peace. Protecting your home’s true value demands more than homeowner’s insurance, so it doesn’t devastate your overall financial position.

Most people feel they are more secure by having their house paid off. Let’s take a look at this. There are many reasons not have a mortgage but let’s look at three emotional and financial reasons to have a mortgage. One, you lose your job. So you go to the bank and try to get some money out of the house. Your house is worth $500K and you owe $100k on your mortgage. So you have $400K you can access. Not so fast, since you don’t have a job the bank is going to be worried how you are going to pay them back and you are not going to get a loan. All your money is tied up in your house. Second, if you became disabled. Even if you have disability insurance but you have a big mortgage with access to capital inside of cash value life insurance policy you are in a better financial position than having no mortgage and no access to capital. This enables you to deal with your new circumstances. Lastly, the uncertainty of the world as shown above are all reasons to have a mortgage.

I believe you are more secure by having a mortgage and having your money in cash value life insurance. This gives you access, liquidity, and control of your money when you need it. Back to your house that is now destroyed. Because you have cash value you can get out of the motel and go rent an apartment until your house is rebuild. The bank will be happy to give you a loan because you can use your life insurance as collateral. You can walk away from the house and deal with a bad credit score for 7 years (which I am not recommending) but in certain instances this may be a good option depending on your individual situation.
Properly funded life insurance should be a protection strategy that homeowners use. If you had a choice would you own this house?

You can always get in a position of having your house paid off but it difficult to get a loan on your house when you really need it. The number one reason people want to have their house paid off is to eliminate the monthly payment. This can be accomplished without sacrificing protection when you have your money in a safe place and not in the house. Do you want to own either of the houses shown above or do you want the bank to?