Every type of housing market has its unique advantages and disadvantages. One of the most pronounced advantages in the current market may look like significant home equity for those who bought and have benefitted from quickly paying down principal from their low mortgage interest rate. That equity could have been further increased by rapidly rising home values the past few years.
In the old days, it was much harder to get a snapshot of the current value of someone’s home, and thus get an idea of existing home equity. Today, however, we have the internet with its multiple online estimates ready to help. If a person is of the mind to take advantage of that home equity – maybe with an eye on paying off higher interest bills or remodeling, lets take a look at three perspectives on leveraging that home equity:
1. Consider a home equity loan or home equity line or credit (HELOC).
Sure the interest will be higher (in general) than existing mortgage rates – especially if it is one of the very low rates from several years ago, but that higher rate only applies to the new amount borrowed. The original balance of your mortgage remains financed at its current rate. Many institutions – including credit unions – offer products along these lines.
2. Sell your existing home, then take the proceeds and purchase another home free and clear.
This may not work in many cases, but I want to introduce the concept of low or no debt into your line of realistic thinking. In this case, you may not have the same type of home as before, but you would also have no payment and full ownership. This also requires quite a bit of home equity to execute.
3. Leave the equity alone and get a personal loan.
There are many options for this as well – some unsecured – that could take care of a present need without touching existing home equity.
I would be remiss if I didn’t touch on some of the downsides to tapping home equity. If the market goes down, you may be in a position of negative equity and unable to sell your home. It also slows down your current trajectory of wealth (security) building that is taking place. Finally, it furthers that habit of borrowing over saving for needs and goals.
Here is some general good-agent advice if you find yourself in this position: “Do not sell or refinance a beneficial interest rate mortgage unless you absolutely have to.” Supplemental loans may be a suitable answer for needs or goals to keep from doing this. There is always saving your own money, of course, and if you would like to brainstorm further, Just ASK!
