Accumulated home equity is the single biggest asset for most American households. Growing home equity by making a bigger downpayment, extra mortgage payments and by minimizing home equity borrowing is a time-honored mantra of “good” personal finance management. But is keeping home equity illiquid in the home really a good financial move?

We recently came across this report (really a sales piece) that presents some though-provoking arguments as to why homeowners might be better off separating their equity from the home and converting it to liquid, secure investments. The basic premise of the report (supported by a well-done illustration of two brothers taking different paths) is that a homeowner who follows a strategy of maximizing tax-advantaged mortgage debt - by making minimum downpayment, interest-only payments, maximizing term of loan, etc. - can invest the funds that would have gone toward principal retirement and come out way ahead of a borrower who strives to pay down the mortgage as fast as he can.

Other key assertions include:

• carrying a large mortgage balance places you in a better position vis a vis the lender in the event of foreclosure;
• liquifying home equity protects you in the event of job loss or natural disaster that might make equity inaccessible;
• idle equity locked-up in the home is subject to housing market risk and yields no return - i.e. the value of a home can rise regardless of equity separated from the home;
• having too many eggs in the idle home equity basket equals poor asset diversification;
• the tax deductibility of mortgage interest makes profitable arbitrage opportunities relatively easy to find.

To a large degree, many of the central points in this report rely on the assumption that homeowners following this strategy will behave rationally and systematically - e.g. the net funds made available from a lower monthly mortgage payment will be diligently invested. We suspect many (most?) typical homeowners would find it very difficult or impossible to be so diligent in the long-run. The reason this strategy may work well for the “affluent” homeowner is that they have other resources to rely on. For the average homeowner, home equity is the most cost-effective way to borrow big sums of money - not for investment arbitrage - but for important everyday needs like a new roof or college for the kids.

This website focuses on ideas and tips for tapping home equity (through the HELOC mechanism) in a measured manner for prudent uses. We do not promote the gung-ho withdrawal of equity for investment arbitrage puposes. But regardless of whether you fully agree with the thesis of this report (”homes are designed to house families, not store cash”), the authors (Steve Marshall & Mike Lowe of Bellevue Mutual Mortgage) do make many good points that are worth mulling over. Overall, it is a well-written document worth taking 20 minutes to read.