When to use home equity for cash
When to use home equity for cash

graphic of a house merged with a bank

chris gash

In Spanish

If you’re a homeowner, you’ve probably made money sitting around since the start of last year. Amid a housing boom fueled in part by the pandemic, the amount of equity people hold in their homes rose nearly 20% in the 12 months to March. That averages out to $33,400 per home, according to CoreLogic, a research firm. And the values ​​went up from there. ​But if the value of your home goes up, so do the day-to-day costs. In addition, many workers have seen their incomes drop. A possible answer? Leverage the growing value of your home for cash.​

However, you cannot withdraw money from a house like you can from a bank; you will have to take out a loan, which will have to be repaid. But with interest rates near historic lows, borrowing against your home can be a good idea, says Pittsburgh financial planner Diane Pearson — as long as you match the right loan to the right goal and, realistically, will be able to able to refund the money. . Here are some pointers.​

​Why borrow… and why not​

Good reasons to borrow against your home include paying for home improvements, long-term care or long-term care insurance premiums, and raising money so you can stay in a home you’re not. not ready to quit. Some financial professionals also suggest using home equity to pay for college tuition or a second home, although there are other ways to pay for these without putting your home on the line.

It’s generally not a good idea to borrow against your home to pay off unsecured debt, such as credit card balances or medical bills. If you run into trouble, it exposes your home to debts that could otherwise be canceled in bankruptcy. And while you can dip into your home for day-to-day expenses if you’re home-rich and cash-poor, it takes away equity that you might need for care later in life or might want to leave behind. to your children.​

Be honest with yourself about whether you can afford the loan. All of your monthly debt payments (including non-home loans) must not total more than 36% of your gross monthly income. If you’re retired and your loan payments would require you to increase the rate at which you withdraw money from a tax-deferred retirement account, borrowing is harder to justify, Pearson says. Unless you have plenty of money for future expenses, can afford the taxes, and have a long-term goal, like fixing a house you intend to sell later, you shouldn’t exhaust your retirement funds to spend them now.

And before you call your banker, know that the same price spike that increases the resale value of your home has caused disruption in the loan market. Home appraisers, exercising caution as prices rise rapidly, are pricing homes at less than what homeowners and buyers think their homes are worth, reports Amy Irvine, a financial adviser who works in Corning, New York, and Parrish, Florida. She finds that home resales are between $20,000 and $30,000 above asking prices and appraised values. This means new buyers and refinancing homeowners will be able to borrow less than a higher appraisal would allow.

This might prevent you from borrowing as much as you want, but it should also protect you from the worst consequences of the financial crisis over a decade ago. “People took stocks – and boom, the market corrected,” Irvine recalled. “And boom, people were underwater.” House prices could of course fall, especially in overheated areas. So there’s a lot to be said for sitting on your new capital, especially if you don’t need the money right away.


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