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Millions of Americans have been awarded substantial equity in their homes – particularly over the last four years – due to the steep appreciation in home prices. Many have take equity out of the house by refinancing the home with at is higher appraise value, often with a mortgage that is more attractive than the original. That’s a double-win: a more attractive mortgage rate and a pile of cash as well.
It’s the homeowner’s decision as to what to do with the money. Many people have taken advantage of the home appreciation bonanza to refinance and pay off heavy credit card debt: trading cheaper, long term debt for more expensive short-term debt. That’s a reasonable choice if you’re comfortable with your new mortgage rate and don’t plan to move anytime soon, but it also calls for a change in lifestyle. It does you no good to pay down credit card debt if you’re going to go out and run it up again.
Make Your Good Bet a Better Bet
It would seem that one of the more attractive options for home equity that is pulled out of the home through a new loan is making improvements on your home. A pool, an added family room, a deck – all these things add value to the home and make it a better place to live as well. In a way, it’s “buying up” by using your equity to acquire a bigger, better home – but staying in the same place.
Many people have also used the long run-up in housing values to use their equity on the down payment of a bigger home or a place in a nicer neighborhood. Low interest rates have allowed individuals in this situation to use the substantial equity they’ve achieved on a large down payment for a bigger house, resulting in a mortgage that is not too far from the house payment range they were in originally.
It’s a reasonable and relatively cautious choice – unless you are tempted to overreach. The unprecedented combination of steep rises in home values and low interest rates have led many people to think that the climb will continue, and so mortgaging themselves up to the neck will, in the not too distant future, prove to have been a wise investment.
Caution is Creeping into the Market
Indications today are that a huge leap into expensive housing is probably not so wise a gamble. Housing prices are not climbing like they have the last four years and interest rates are. People with good incomes who are taking out multiple mortgages to get into high end homes may find that, five years hence, the equity hasn’t materialized that will allow them to refinance, pay off the ancillary loan and lower their monthly payments. The attractive interest rates may well have disappeared as well.
Managing your Equity as Credit
There are still lots of attractive options for putting your equity to work. You might consider refinancing your mortgage into a ten or fifteen year loan and get your home paid off earlier, while maintaining maximum use of the tax deduction for mortgage interest. You can simply open a home equity credit line and use your equity as collateral for smaller loans – certainly at more attractive rates than simple short term credit borrowing. But most people in the realty and mortgage business see a tide change in the market. The rapid accumulation of equity and the multiple advantages of refinancing at record low interest rates are not going to be across the board factors in the market. If you currently have major equity in your home and you want to put it to work, use it wisely. This may be your only opportunity – until the next cycle comes along.
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