It makes a lot of sense for the reasons we just explained. We advise our clients to always keep their home fully encumbered by mortgages, even if they periodically refinance their mortgages to cover their equity as their home value increases.
You may ask: "Why pay interest on a loan, that I don't need, to protect myself against a lawsuit that may never happen?" Great question! Refinancing your home to reduce your exposed equity may not make financial sense even when it makes legal sense, but a home equity line of credit is always sensible when you're not fully homestead protected. For instance, a $200,000 mortgage free home should qualify for a $150,000 home equity loan or line of credit. You owe your lender nothing and pay no interest until you actually borrow against your credit line, which you would do only if you're sued. A prospective litigant checking your assets would see that you have only a $50,000 equity in your home because of the recorded $150,000 mortgage. You are then a less attractive lawsuit candidate. An equity loan, line of credit or reverse mortgage can cover much of your home equity. Once the loan is in place, you can quickly draw down the line of credit if you are sued and can protect the cash proceeds as you would your other liquid assets.