Not bad.

Ah, but the risk

Neither of the scenarios described above account for common what-ifs:

What if Mr. Smith is "downsized" at work and has to relocate while his investments are showing a loss? Hope he has some big cash handy or some seriously eager home buyers.

What if the state where Mr. Smith resides taxes capital gains at 5 percent or more? That being the case, in Scenario 1 he loses at least $3,268. In Scenario 2, his net profits drop to $34,625.

What if the stock market meanders for the next ten years and his investments earn only 4 percent per year? Congrats, Mr. Smith! In Scenario 1, you lost $26,535. In Scenario 2, you’re down to $10,482.

Thanks to the recent period of historically-low interest rates and rocketing home values, many people have amassed nice chunks of home equity.

If you listen to your broker, investing that equity elsewhere looks like easy money — a real no-brainer. But like many things in life, the risk shows up big when you gaze through the magnifying glass of reality.

As for me, I’ll take my "dead equity" over low equity any day.

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Michael Milner is a freelance writer who writes a popular personal finance blog (see www.MoneySpot.org). He lives with his wife and baby daughter in Oklahoma, where their home’s equity is alive and doing quite well.

© 2005 The Cheapskate Monthly. All rights reserved. Used with permission.

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