For many homeowners, their home equity represents their single largest asset and the biggest component of their total net worth. However, home equity is also the asset that people pay the least amount of attention to when it comes to financial planning. There are many ways that the efficient management of home equity can enhance wealth and support many financial planning goals.

A mortgage/line of credit, or lack thereof, is most often the tool used to manage home equity and achieve various financial and lifestyle objectives that people have at different times in their life.

Background

If you have owned a home in Colorado for more than 5 years, Congratulations! You have most likely made a lot of money.

From March 1991 through September 2018, housing prices in Colorado have increased 366.03%. In the past 5 years housing prices in Colorado have increased 58.76%.  In the Denver metro area, the appreciation has even been higher.

During this time frame, Colorado has experienced the second highest level of housing appreciation second only to the District of Columbia. The top 5 states for appreciation since 1991 are as follows:

  1. District of Columbia        440.95%
  2. Colorado                            366.03%
  3. Oregon                               331.65%
  4. Utah                                    326.57%
  5. Montana                            306.57%

The national average for all 50 states during this time is 161% and every state had appreciation. For emphasis, there were no states where values declined over this period.(Source: Federal Housing Finance Agency (FHFA), Home Price Index (HPI), November 27, 2018)

Planning Opportunities

There are many financial planning opportunities for a homeowner to use their equity to improve their overall financial position and increase their wealth long term. These alternatives and options are tied to factors that are unique to each individual and their current goals and objectives. Following is a brief nonexclusive list of strategies and techniques, along with the respective benefit for each, that can be implemented to manage home equity in the context of the broader objective of financial planning:

  • Strategy: Obtain a 10, 15 or 20-year mortgage instead of a 30-year mortgage.
  • Benefit: Builds equity and saves interest.
  • Strategy: For individuals over 62, a Reverse mortgage can provide significant financial benefits whether the homeowner has a current mortgage or not.
  • Benefit: Wealth building tool and access to equity without payment and without affecting ownership, future appreciation or the ability to pass on the house to beneficiaries;
  • Strategy: Use the current equity to consolidate and reduce other debt.
  • Benefit: Lower interest rates, improve monthly cash flow and pay down debt faster
  • Strategy: Strategic use of a line of credit
  • Benefit: Accelerate the payoff of an existing mortgage balance in as little as 7 years.
  • Strategy: Finance improvements and renovations
  • Benefit: Enhances the value of the property and the equity position.
  • Strategy: Finance the acquisition of other assets/investments.
  • Benefit: Obtain either income producing assets/investments or assets/investments likely to appreciate, or both, thereby increasing total net worth.

The list above is not exhaustive, and there are many other strategies that may be effective depending on specific circumstances. The main point is that there are many ways to manage home equity in a manner that facilitates more effective financial planning.

If you are interested in discussing managing your home equity or discussing any of the strategies outlined above, give me a call.