Many homeowners are in a rush to pay off their home loans. This is not always a wise decision. First, you lose liquidity and put your home equity at a higher risk. This is especially the case if you have little cash set aside and if you have few liquid investments. You should always strive to have at least six months of savings set aside.

Consider the following two situations. The first is a homeowner who routinely pays extra on her mortgage with the intent of the home being paid off early. Yes, it is true that if you pay a little extra each month, you will pay the home off substantially faster. Now, the second homeowner only makes the minimum payment each month.

Let’s imagine that a few years go by and both homeowners lose their jobs. And can no longer make their mortgage payments. Who is better off? The first homeowner has more equity than the second owner. However, the real estate market is slow and she may not be able to sell the home before it goes into foreclosure. And, yes, the second owner is in the same situation.

That being said, the second homeowner, who had been just making the minimum payment, has more options. She knows that the bank has little incentive to foreclose on the property. This is because the mortgage balance is high. That is, the bank isn’t in a position to gain hardly anything by foreclosing. The firs homeowner is a better target for the bank because they can sell the property and recover their losses.

Let’s also pretend that the second homeowner either saved or invested the money in which she was considering paying extra on the mortgage. She now has multiple options. She can keep current on her mortgage from these savings. This is the case whether she kept the money in a savings account or invested the money in liquid investments like stocks. Or, if she stops making the payments, the bank would be in no rush to foreclose.

Banks are incentivized to foreclose on properties with low loan balances first. This is because they can recover their losses easily. A home that is underwater or has a high balance will cause the lender to incur a loss, which is why lenders are seldom in a rush to foreclose on an underwater home. This is especially the case in a weak market because it would only add to the inventory of homes for sale, which is one more thing driving down prices.

Markets correct themselves over time. After periods in which too much supply was dumped on the market, depressed prices lead to an increase in demand. This has been reflected from the fact that foreign buyers are buying properties with cash in the most distressed markets. And population growth has help absorb the excess inventory. Real estate is now in line with historical prices in many localities. This will help create a bottom in the market going forward.

In most US markets, the excess inventory has slowly been getting soaked up over the last five years. If you were a homeowner during this span, you realize how painful it has been. On a more positive note, buying a home is very affordable. In the most distressed areas, it’s considerably cheaper than renting. This situation usually only occurs in distressed markets and the opportunity will not last forever.

This good news does not imply that housing will immediately rebound and prices will start going up. They likely will go up in price over a long period of time. And real estate is a good long term inflation hedge. However, we are still in a period of deleveraging. This means that many consumers have too much debt and are slowly paying it down. This will be a drag on our economy for a while yet. Deleveraging is a process that takes years to complete. Deleveraging is the main reason why it takes such a long time to recover from a major financial crisis.

The one thing that can speed up the deleveraging process is liquidation. Bankruptcies and foreclosures can clean up a person’s balance sheet quickly. Obviously, there is a huge drawback to this. If too many people liquidate at the same time, bankers and creditors will also suffer and perhaps go bankrupt. This creates a downward spiral and leads to financial crises and panics. Although liquidation gets us through the debt problems more quickly, the pain is much sharper.

Record low interest rates make buying a home a great bargain for new homeowners. This is a big part of why buying is so much cheaper than renting in many markets. Low interest rates aren’t likely to last forever. They could be around for a while as it’s impossible to predict when they will rise. The Federal Reserve has announced that they will keep interest rates low through 2014. When inflation inevitably rises, they will have no choice but to raise them. Inflation will likely rise once we get to the end of the deleveraging cycle.

The real estate market in Las Vegas continues its extended slump. S & P has reported yet another 8.5% drop in prices, this time covering a period that spans form October 2010 to October 2011. The Vegas area also has an unemployment rate of 12.5% with tons of underwater mortgages.

On a more positive note, those who have a mortgage owned by Fannie Mae or Freddie Mac may be able to refinance even with an underwater mortgage. You may not get the principal reduced, but you may be able to reduce your monthly payments considerably. See our video below.

Because the current market prices haven’t been seen since the 1990′s, home prices are now cheap from a valuation standpoint. Prices are now in sync with people’s incomes. Record low interest rates allow you to get into a home for a very low monthly payment. Because of low prices and cheap borrowing costs, buying has become attractive. It’s also important to note that this is one of those rare periods in which renting is more expensive.

Going forward, the economy appears to be merely muddling along. There is no strong recovery in sight for the Las Vegas economy. Vegas is still far too dependent on gaming and tourism. It will take years for new businesses to ultimately absorb the excess capacity of workers and grow the economy.

We’re simply not going back to 2007. Other state and local governments are struggling financially also. Many of them will attempt to boost revenues through more lotteries and gaming. This makes them a direct competitor to Las Vegas casinos. We have already seen that gambling revenue is an increasingly smaller share of casino profits. Casinos are forced to offer more in the way of shows, shopping, and dining to keep luring people to travel to Las Vegas.

In the long run, the Las Vegas economy needs diversification. The era of being dependent on a single thing are long over. On a positive note, Nevada is a very business friendly state. Barring any drastic change to the state’s tax system, Nevada should be able to attract many new businesses to the area.

If you are underwater with your mortgage (doesn’t matter how much), you may be able to qualify for a refi. This is for loans that are owned by Fannie Mae or Freddie Mac. Even if you make a payment to your bank. The loan had to have been put in place before June 1, 2009. You must also be current on your payments.

If your bank still services your loan, it may NOT own it. In fact, banks often collect the payments and service the loans long after they sell the loan to Fannie Mae, Freddie Mac, or another investor. Don’t assume the company in which you make your payments to owns your loan. In addition, you’re better off not calling your bank directly because the customer service rep may be clueless about whether or not your loan is still in the original lender’s portfolio. Not to mention the fact that you’ll be on hold for a long time. This is why you need to look into who actually owns your loan to see if you can qualify. You can do this by checking the Fannie Mae and Freddie Mac websites.

Here are the links to the Fannie & Freddie websites:

• Fannie Mae Lookup
• Freddie Mac Lookup

Once you have done that, you can go on to the next step. If your loan is indeed owned by Freddie or Fannie, you can look at what your refinance options are. That is, you can calculate how much it would cost to do the refi and how much money you would save each month. If your loan is small (under $100k), you may not stand to save a whole lot as the fixed costs of refinancing would not make it worth it. The higher the loan balance, the more money you can potentially save.

HARP II could result in less foreclosures in distressed real estate markets such as Las Vegas. This will keep housing inventories lower in the short run as homeowners will be able to make lower monthly payments, which will keep them in their homes longer.

This doesn’t mean that the market will turn around in the near future, however. There are many foreclosures in the pipeline as many conventional loans will not qualify for refinancing. This program is set to begin in March and will have some impact on the market.

Although it won’t be a miracle cure, it will have an impact on keeping the shadow inventory lower for a period of time. Many of the homeowners that were on borderline as to whether or not they would walk away from their home will now lean towards staying in the home. This will be good news for the most distressed markets.

Liquidity is one of the most important factors when deciding on how to manage your financial assets. Tough economic times are usually temporary. During times like these, you should err on the side of caution and have plenty of liquid and non-volatile assets. This does not mean you need to turn into a gold bug. However, when deciding to pay down your mortgage, think twice. Should you need access to that money within 5 years, you should find a more liquid investment for your capital instead and keep making the minimum monthly payments.

The equity in your home is not liquid. This means that you simply cannot withdraw and use it anytime as if it were money in the bank. You must plan for the unexpected. You should always maintain some liquidity because there will inevitably be times in which you need cash fast.

There was a time where people believed that equity was almost equal to cash. In a healthy market, you would indeed be able to refinance or sell quickly to extract your equity. This is not the case anymore. It is much harder to quality for a refinance even if you have positive equity. Your credit must be very good and you need to prove your income has been steady for the last few years. In the current environment, you cannot assume that all of your home equity is readily accessible.

When the economic environment is good, people seldom need cash. And cash is much easier to borrow. This is especially the case when asset prices are rising. When the economy is contracting or at stall speed, it is a different story. Lending will often seize up and the capacity you had to borrow will also be gone. Most people take this for granted during the good times.

The harder times generally present the best opportunities. The real catch is that they are difficult to take advantage of. For example, real estate is a great buy in many regions today. At the same time, how many people can afford it right now? How many people are lendable especially for investment purposes? So, despite the enormous opportunities that exist, they are out of reach for many. The statement that bear markets present great opportunities for investors is only a half truth. This is only true to either a new investor or an investor that is buying that asset class with no prior holdings of it. This also assumes that you both have the ability to recognize the opportunity and the means to be able to afford it.

A cynic usually says that a bank will only lend you money when you can prove you don’t need it. This has been quite true at times.

Currently, it’s cheaper to buy then rent even when taxes and insurance costs are factored in. This is a very unusual time. This situation only happens after a market crash following a bubble. When things return to normal, the process is generally chaotic.

The last decade saw prices rise to a point that was far beyond being affordable. Returning to normal was inevitable in the long run. After a bubble pops, things generally don’t just return to normal and stop. A correction is usually opposite in proportion to the bubble that it corrects. Now, prices have fallen below the long term trend line.

Having said that, you should not expect a fast recovery. Even though it is finally a good time to buy, there should be no rush. Another historical fact is that recoveries following a massive boom and bust cycle will take many years. One more important point is that there is no guarantee that prices will not fall further.

This is does not mean that you should wait with the sole purpose of timing the bottom. Like investing in the stock market, timing the perfect buying opportunity is next to impossible. Goldman Sacs predicts that prices will fall nationally a bit further and bottom out in 2013.

If you’re buying for investment reasons, be sure to make a good positive cash flow. In addition, don’t forget to factor in vacancy loss when calculating your investment’s potential. In Las Vegas especially, vacancy rates are very high as many homes are sitting empty. You can use our cash flow analysis calculator to avoid the most commonly overlooked expenses.

Another reason why buying now makes sense it that interest rates are near record lows. This will not last forever because government deficits and money printing will eventually overwhelm the financial system. If you can lock in a low fixed interest rate, it is likely you’ll pay off your new home with very cheap dollars over the next 30 years.

Hope does not make for a great strategy, as any biography of Ben Franklin will remind us. But, many people do hope for such luck. This is reflected by the number of people who play the lottery, slot machines, or any other activity where the expected value of the payoff is far less than their bet. With a good, carefully planned investment, the expected value of the investment (or money put down) is far greater than the capital they’re tying up.

The chances of achieving wealth through luck alone are almost nothing. Sure, there are those who earn wealth ethically where luck was part of the equation. The point here is that luck is only part of the story. Abe Lincoln once said that if I prepare myself, perhaps my chance will come. Preparing yourself will reveal the “lucky” opportunities. In reality, people seldom build wealth from chance alone.

Good financial planning is a practical way to accumulate wealth over time. This is a slow, steady, and boring process. Yes, boring. Building wealth in a sensible manner doesn’t mean flipping houses and buying “dot com” stocks. This is just another form of gambling. Instead, it consists of having a plan that incorporates investing with regularly, diversification, and limiting risk.

As we have seen from the housing bust, it is important to take all assets into consideration. People traditionally thought of their house as being an investment. The reality is houses are a depreciating asset just like any other consumer item. These items get used and wear out. Therefore, there is considerable expense to owning a home. Inflation, over time, distorts housing prices.

In nominal (meaning not adjusted for inflation) dollars, real estate prices tend to rise over very long periods. This refers to spans of 20 years plus. However, when you adjust for inflation, resale value for the home remains fairly steady. The only exception is the recent real estate boom and bust cycle. Although the resale price is roughly the same after factoring in inflation, remember all the costs associated with maintenance and repairs. This equates to a large sum of money over a period of time.

When looking at all your assets, it’s vital to understand which ones are long term investments and which are consumer items. Although buying a home is often a great choice, it should not be classified as an investment. If you rent it out in the future, then you can re-categorize it at that point. Until then, it’s important to recognize it for what it truly is.

If you reach a point where that particular home gets rented, and it meets all the expenses, then you have a real investment. If you keep it hoping for the price to go back up or are looking for capital appreciation, then it is only a game of speculation.