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 that reduces the mortgage balance.  In a sense, 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 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). Many people believe that they cannot or should not use their home equity.  First, a homeowner can access and use their home equity when and how they choose subject to qualification guidelines.   Secondly, the question of whether a homeowner should use their housing equity to meet financial or non-financial needs is an individual decision that is unique to their circumstances.  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 their home equity are the following:
  1. Obtain a mortgage with better terms and/or a lower payment
  2. Obtain cash to meet a financial obligation or need
  3. Make home improvements
  4. Pay off other debt with high payments and interest
  5. Make investments that may provide a better financial return
  6. Meet educational expenses for children
  7. Meet medical or long-term care expenses
  8. Establish an emergency fund
Because the interest rate on any borrowing association 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 taxes and the interest paid on any type of home equity borrowing can be tax-deductible under certain circumstances. Home equity management refers to the process of using equity extraction via loan at favorable and tax-advantaged interest rates to invest or manage cash flow in manner that offers higher returns and cash flow. Following are the most common strategies to access home equity:
  1. Rate and Term Refinance
  2. Cash Out Refinance
  3. Home Equity Line of Credit
  4. Fixed Home Equity Loan
  5. 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 all homeowners.  However, when used correctly they each 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. As stated earlier 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 if and/or when they want to determine if using their equity is right for them.  We work with them to explain the pros and cons of each option and provide the information that they need to determine whether utilizing their home equity, their asset, is a good financial option.