As you drive down the typical residential streets in, say, Los Angeles' Santa Monica or Pacific Palisades neighborhoods, knowing what real estate sells for these days, you can't help but think everyone who lives there is a multimillionaire. But more realistically, there are renters and plenty of others with king-size mortgages and little equity. There are also plenty of people under the classification "house-rich and cash-poor." There is really nothing so bad about that as long as those people are somehow insolated from a bump in the road, should something come up unexpectedly. Being house-rich and cash-poor might simply mean that a homeowner has a million dollars in equity but less than $30,000 in the bank. People may be able to live quite comfortably with that scenario depending on the property taxes and whether they have a source of income that allows them to stay relatively even between their expenses and their income, only occasionally dipping into their savings.
The real problem occurs when income does not cover expenses, when you are dipping into your savings every year and you suddenly have little or no reserve for an unexpected crisis, or even just to sustain your current lifestyle. Of course, there is always the possibility of a refinance cash-out or a reverse mortgage, but there are specific criteria necessary to qualify, not to mention that a reverse mortgage is not for everyone.
Let's assume you've already explored refinancing and a reverse mortgage and neither is available, given the qualifying factor and any other reasons. There are very few other options when your back is against the wall. What if the market is in a slump but you have no other choice but to sell? That would not be a good feeling at all, given that your timing would be totally off.
What could you have done differently? The answer is the same as in many other situations: Pace yourself, and quit being in denial. My suggestion is to always look five to seven years ahead. Consider your age; income; job security, health insurance and health benefits; children; tuition and education; grandchildren, taxes and potential tax increases; mortgage; and overall cost of food and other fixed expenses like utilities, gas, auto expenses, etc.
Where will your cash reserves be in one year? Two years? Three years? Four years? Will you still have a solid nest egg in years five, six and seven? If the answer is yes, then you should be fine, at least until the next seller's market. If not, you could get stuck in a less-than-favorable buyer's market, with no time to procrastinate.
If you plan things out early, you can start by trimming back on entertainment, travel, fancy gifts and eating out at expensive restaurants. Trimming back early is not nearly as painful as needing to sell your home while being under pressure. See a financial planner, or call someone with experience to troubleshoot matters that might, when sorted out early, clear the way to stay in your home. I'm always available to share my thoughts and point you in the right direction.
For more information, please call Ron Wynn at 310-963-9944, or email him at [email protected] To find out more about Ron and read his past columns, please visit the Creators Syndicate webpage at www.creators.com.
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