Traditional wisdom preaches “pay-off your house.” When crisis strikes
Disaster & a Senator
on the funds. If you
or catastrophe calls, that kind of wisdom could possibly wipe your
Fame, fortune and access to armies of advisors of-
have money in a mu-
wealth away in one fell swoop. Why are we safer with a large mort-
ten don’t protect you – unless one of those advisors
tual fund or a stock, even
gage? If all your cash is tied up in a place where you can’t get your
is a well-trained mortgage planner. In fact, being a
though you must wait three
hands on it, what happens in emergencies? You really don’t have
U.S. Senator didn’t even do the job for Mississippi’s
days before your check can
control when most of your assets are bricked behind the walls. You
Trent Lott. A newspaper reported that Senator Lott
actually be cut and sent out
have fewer options when you must go through a time-consum-
had nearly half of his retirement savings stored in his
to you, it is still categorized
ing mortgage process to get to your cash. You are vulnerable to
“paid-off” vacation home on the Gulf Coast. The house
by the financial community
market conditions, at risk in crisis and much less safe. If you
had been his nest egg for retirement and he lost it to
as a liquid investment.
are experiencing a job loss or temporary disability, getting a new
the flood waters of Hurricane Katrina.
Of course, cash in a jar buried in
mortgage could be difficult, if not impossible. How safe is that?
your back yard is extremely liquid,
Who is in control in that situation?
Though he believed his beautiful home was fully
insured, the flood insurance program only replaced a
if you can remember where you buried
And I hope your Plan B for financial security isn’t saying to your-
small portion of the valuable property. Though he had
it. (That safety may also be questionable if your back
self, “Oh, I’ll just get a home equity loan when I need cash.” The
followed traditional wisdom and probably thought
yard is 10 feet under water. Pardon the pun.)
recent bank problems have caused many sources of home eq-
he had a smart plan with a free-and-clear house, his
Stocks and mutual funds don’t possess the level of
uity lines of credit (HELOCs) to simply disappear. These days,
beautiful second home was…GONE FOREVER!
liquidity inherent to immediate cash accounts, like
when you possess a high enough credit score to get one,
savings, checking and money markets. A bank CD,
you’ll likely be limited to a much lower credit line than may
“That was my nest egg. It was about half my net
even though you might have to pay a penalty for early
have been available to you just a few years back.
worth. I have a $400,000 loss after the flood
insurance. Its appraised value was probably $600,000
withdrawal, is also categorized as very liquid. On the
Additionally, many lending institutions that
to $700,000, but I had been offered more to sell it.
other hand, cash inside real estate is considered com-
service current HELOCs have reduced the
That was the first thing I ever had that was paid for.
pletely non-liquid. Quick access is totally blocked. In
amount you can access or even frozen
The hurricane certainly complicated my decision
other words, you can’t get to it without a lot of
many credit lines homeowners
across the board. From a personal standpoint, I need
time and effort.
already have. If you are relying
a little more income.” -- Trent Lott, U.S. Senator,
Why do those who understand mortgage planning
on just keeping a HELOC in
www.SunHerald.com
know the value of liquidity? Because they keep a big-
your back pocket for emer-
gencies, you better check the What is Liquidity?
picture view of their wealth and they place a huge
significance on accessibility, control and freedom. Pro-
fine print on your contract. Liquidity is a term you may have heard being ban-
tecting their choices, maintaining options and safe-
It may not be as accessible as tered about by the talking heads on CNBC or by a
guarding their principal are always in the forefront of
you expected. financial advisor in your past. But do you really know
their planning strategy.
what it means? In the financial world, liquidity means
Being house-rich and cash-poor can be a recipe for disaster. This outdated wis-
“the ability to access your cash.” It’s that simple. An Why do those who understand mortgage planning
dom could leave you in a sad position. As our real estate values rise, most of us just
example of a liquid account would be a checking ac- know the value of liquidity? Because they keep a big-
sit back and let our equity grow. Over time, we slowly and methodically chip away
count. If you need your cash, you just pop a card into picture view of their wealth and they place a huge
at that “terrible, big, bad monster” we call our mortgage. This combination often
an ATM. You could also write a check. Your money is significance on accessibility, control and freedom. Pro-
creates massive wealth we may never be fortunate enough to hold in our hands. It
readily available to you. tecting their choices, maintaining options and safe-
could all be taken away from us in the blink of an eye.
guarding their principal are always in the forefront of
There are varying degrees of liquidity. A money mar-
their planning strategy. Continued on page 33
ket account is readily available by just writing a check
www.coloradohomeownermag.com www.coloradohomeownermag.com
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