In terms of preparing for financial hard times one of the things most often recommended is to pay off all debt. Owning your home outright is one of the goals and a good one because if you own it then you don't have to worry so much about keeping a roof over your head as long as you can come up with enough to pay the property taxes on it and whatever other fees you may have to pay like an HOA or something.
I agree with the plan of having no debt and having your home paid for. That's why I was interested to see what was in this article titled "Housing Recovery: Sell Now Or Your Capital Will Be Trapped".
It is an interesting read. The idea is that when the mortgage interest rates double then the amount of the loan has to be reduced by a half for the payment to be the same. That is true but doesn't take into account reduced wages or the unemployment rate causing people to borrow less money than they qualify for based on their debt/income ratio. Those things tend to push down the price of the home even more. Higher income and property taxes will also push down the value of the home.
However, this does not mean the end of the world or that selling your house now to "free your capital" is a great idea. Your capital is only trapped if you sell the house. You may be forced to move for employment or some other reason, but even if you move you might be able to rent your old house out and turn a profit without having to worry about the trapped equity. If you are moving out of a "one horse town" so to speak where there is only one big employer and they are going out of business then finding renters may be difficult. However, in that situation the lack of employment in the area will drive the price lower than the high interest rates will. Look at home prices in Detroit as an example of that.
The other option to free your "trapped" capital is owner financing. Owner financing has been fairly common on rural land in some areas maybe since people started owning land instead of using open range. The buyer can get an interest rate that is lower than they could from a bank or mortgage company or they could get owner financing when they couldn't get bank financing. The seller can get more money overall because he gets the principal and the interest. The downside is that you may have to evict someone and if you do that they may damage your property and you either eat the cost or sue them. Owner financing land is safer in that respect because generally people don't do anything to permanently damage the property value. I guess they could leave piles of scrap metal and old cars on the property but these days scrap metal dealers would probably take care of that. Banks obviously don't like you having the option to sell with owner financing. Too bad for them.
My parents had a number of rent houses and they sold them all with owner financing. They had to take a couple of them back but that didn't cost them all that much. When they took the house back they got all the money the person had paid for principal and interest and after spending some money to repair the damage they were able to sell the house again for full price. They only offered owner financing to people they had rented to for a while and who had proven that they could hold a job and pay their bills on time. If you've rented to a family for two or three years and had no trouble then they are probably a pretty safe bet for paying off the house.
With owner financing you also have more options for a payment schedule. 10 year, 15 year, 20 year, 50 year, whatever you both agree on unless there are state or local laws that dictate otherwise. You can free your capital and give yourself a regular income for years to come by owner financing.
I wouldn't use this method to pay the mortgage on the new home because if the buyer does quit paying and cuts off your supply of cash then you may get in trouble as well. Only use this if you can afford to not have the payments coming in for a while.
Getting your capital "trapped" in your home is an interesting idea but it's not one that I'm particularly worried about.
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