Many people have asked me recently how they should manage their home’s equity now that the housing market has stabilized. It’s a great question and one that signals signs of health and growth in the housing market. Here are 4 ways to manage the equity in your home.
- Payoff Debt
Your home is like a bank where the value can be turned into cash for what you do not owe on the original loan, within reason. Many of my clients are finding their home’s value is a great vehicle to manage their monthly cash flow and payoff their consumer debt such as credit cards or personal loans. Remember that the interest on credit cards is not amortized to be “paid off” anytime soon and the interest you pay on revolving debt and most personal loans is much higher.
Through a cash-out refinance on your first mortgage, you can take the equity and apply that money to paying off your debt. We recently closed a loan with this very scenario and the borrower is saving $1400 a month on their expenses by consolidating their credit card debt into a refinance. Their mortgage payment goes up, but their monthly cash flow goes down significantly. See below:
2. Home Improvements
Home improvements can do a lot for your home’s value in the future, not to mention it’s resale value when you decide to upgrade or right-size your home. You can access the equity in your home for home improvements either through a cash-out refinance or Home Equity Line of Credit/Loan (HELOC). Both offer their advantages depending on your goals. You can also use a Renovation Loan through FHA’s 203k loan program or Conventional’s Homestyle loan program. Check out my Blog Post on the Renovation loans.
Some banks and credit unions will consider a HELOC for home renovations at a greater loan-to-value (LTV). For example, one institution goes up to 130% LTV for home improvements with a General Contractor bid. Others will go up to 100% LTV on a HELOC. But you MUST read your loan terms.
HELOC’s are generally interest only payments for the first 10 years meaning you are not reducing any of the principle money owed. This is why a HELOC is not a good option for debt consolidation. You should have a strategy for paying off your HELOC or Equity Loan before signing the paperwork. This can make doing a simple cash-out refinance more attractive because the risk is less involved only making one house payment vs two! Here is a resource guide for HELOCs and shopping around for the best products.
3. Sell your home & Payoff Debt
You’re kidding right? Why would I sell my home and buy another when I’d be paying more for the house and a higher rate on my mortgage? 6 Reasons to Buy a Home
Great question! It’s because if you are paying a lot of consumer debt you can payoff that debt from the sale proceeds and still put a down payment on a new home. In the end, you can save on your overall monthly expenses and truly save that additional cash you’d otherwise be paying on debt. It’s an opportunity if you are contemplating buying a new home and don’t know how it will affect your monthly expenses considering the mortgage payment may be higher than what you are paying.
Take the image above as an example. This borrower can sell their home at market value, take the equity and payoff $35k in consumer debt totaling $1,274 in monthly minimum payments. They will still have funds left over for a 5% down payment on a conventional loan and save $454 a month overall with a new mortgage on a new home.
We can take it a step further and take the $983 they are saving through debt consolidation and apply that as a principle reduction on their mortgage every month. They will pay off their mortgage in less than 15 years and ultimately save over $80k on interest. Pair this with an Adjustable Rate Mortgage (ARM) product and you can understand the power of prepaying your mortgage. Mortgage qualifying is more than the interest rate but the planning for wealth in the future.
4. Sit & Relax
The last way to manage your home’s equity? Do nothing at all and enjoy the appreciated gains. Just because I love German Chocolate Cake doesn’t mean I eat it every day. Sure, it’s not as much fun and you could do other things that aren’t limited to this list. You can get creative and start a business, invest in other real estate, make principle reduction payments, or buy your vacation home.
Whatever you decide, just be smart in your decision and planning processes. Get your own Homebot Report or read my latest Blog Post on Homebot. The sit & relax approach is having the confidence knowing you have access to your home’s equity when you need it or when an opportunity arises. If you are interested in a FREE report on how your Home Equity can be used, send me a message and we will discuss your options! Thanks for reading.