Your home equity represents the current market value of your home minus the liens (mortgages) that are attached to the property.
Home equity increases when the value of the home increases and when mortgage principal is paid to reduces the mortgage loan balance. Home equity represents savings that the homeowner has accumulated. Home equity decreases when the value of the home declines or when a homeowner takes out a loan against the property. When a homeowner uses their home equity they have made a financial decision to achieve a financial goal or objective today rather than wait to utilize it a later date (such as when they sell the property).
A homeowner can access and use their home equity when and how they choose, subject to qualification guidelines. The question of whether a homeowner should use their housing equity to meet financial or non-financial needs is an individual decision. There are good uses of home equity and there are certainly poor uses of home equity. The key point is that home equity is an asset of the homeowner (for many it is their largest asset) and can be used by the homeowner for any purpose they choose. After all, it is their money. Among the reasons people choose to use home equity are the following:
- Obtain a mortgage with better terms and/or a lower payment
- Obtain cash to meet a financial obligation or need
- Make home improvements
- Pay off other debt with high payments and interest
- Make investments that may provide a better financial return
- Meet educational expenses for children
- Meet medical or long-term care expenses
- Establish an emergency fund
Because the interest rate on any borrowing associated with a home is lower than the interest rate on a credit card, a car loan, or other personal loans; using home equity can have significant benefits compared to utilizing any other type of borrowing. Additionally, utilizing home equity can be a more effective and tax-efficient way to access needed funds than withdrawing funds from a savings account, an investment account, or a retirement account. Lastly, a unique benefit of using home equity is that borrowing against home equity is not subject to income tax and the interest paid on any type of home equity borrowing may be tax-deductible under certain circumstances. Following are the most common strategies to access home equity:
- Rate and Term Refinance
- Cash Out Refinance
- Home Equity Line of Credit
- Fixed Home Equity Loan
- Home Equity Conversion Mortgage
Each of the above strategies have pros and cons and may not be appropriate in some circumstances and may not be suited to everyone. When used correctly, each strategy can provide significant benefits. For example, with a Home Equity Conversion Mortgage monthly payments are optional and there are unique features that can benefit married individuals who are over the age of 62.
There are many financial and non-financial reasons why a homeowner may want, or choose to use the equity in their home. Our role as mortgage advisors is to help our clients understand the options that are available to them. We explain the pros and cons of each option and provide the information needed to determine whether utilizing housing equity is a good financial option.
**********
We may be able to help you improve your financial position and build your wealth through proactive mortgage planning and the effective management of home equity. Contact Wayne Tucker at 303-468-1985 or at wtucker@spectramortgage.com.
