The ingredients are there. Mortgage rates are still near historic lows, property values have been increasing, and your house is an asset considering how active the real estate scene has been recently. Its value as an asset may have also grown, so maybe it’s time to consider putting your home’s equity to work for you.
I’m not talking about using it as a piggy bank like what many people were doing before the 2008 market crash. I’m talking about using good reasoning and common sense analytics to determine the value and benefit of accessing the equity in your home. Banks are still cautious with lending and require there be a minimum of 10 to 15 percent equity remaining for loans being utilized to pull equity from a home.
Let’s start at the beginning. What is equity? Equity is the amount equal to the difference between the home’s value and the liens held against it. It’s expressed as both a dollar amount and a percentage:
In this example, let’s allow for 15 percent equity to remain; a total of 85 percent of the home’s value is eligible to be financed. Usable equity would be the amount available after factoring in existing lien amount(s). See below and we will use the above example’s house value:
Determining the amount of usable equity is important in making a decision about what it can be used for. In most cases, utilizing equity typically involves things like debt consolidation, home improvements, college tuition, and other education-related expenses.
Once you have the amount and the purpose of the equity targeted, it’s wise to consider what alternatives you have. Doing so can give you a good comparison to help reach common-sense decisions. In that spirit, here are some things to think about:
For debt consolidation: Consolidating debts to leverage your savings is a great financial tool unless behaviors don’t change. Consolidating debt only to acquire more debt is extremely problematic since you haven’t actually eliminated any debt, so make sure you consider your credit habits.
For home improvements: Are the improvements true upgrades or deferred maintenance? Depending on what projects you have in mind, consider the realistic rate of return associated. Some projects may yield a dollar-for-dollar return while others may yield nothing, and that’s okay. Home improvements don’t always have to be big and shiny. Some simply make a home more livable and stress-free as long as you don’t have false expectations.
For college education: Student loans can be extremely expensive, but it’s smart to determine if they’re a more affordable option versus leveraging home equity.
Accessing equity involves underwriting and a property valuation, and it can be done with refinance loans or by lines of credit in a secondary lien position if you already have a lien in the first position. There are many things to consider when determining the value and benefit of using your home’s equity, but current lending conditions are optimal with low rates and increasing values. Now is a great time to get started, but make sure you don’t get muscled into applying for something before you get to have a detailed, analytical discussion with a qualified loan officer.