March 24th, 2017 8:31 AM by Jackie A. Graves
Cash-strapped middle class families may be richer than they
think. Or at least, that could be true if they have owned a house for a while.
Equity in a home – that is, the value of a property in excess of any mortgage
balance – can be a powerful financial tool if used correctly.
Home equity loans allow you to use your home equity to finance
other expenses. "The thing I like about home equity is that it can let a
person live out their dreams," says Vince Liuzzi, executive vice president
and chief banking officer for DNB First. However, tapping into equity can also
be a recipe for disaster if not done properly.
"It's very important to have a committed, disciplined approach to what you're
going to do with that capital," says Ryan Boykin, cofounder of Atlas Real
Estate Group in Denver. Blowing it on a vacation, for example, can leave you in
debt and without anything to show for it.
For those who are ready to make the most of
their home equity, here are five options recommended by experts.
Finance an expensive purchase. Using home equity to pay for a
major purchase can make financial sense. Home equity loans often have low
interest rates, and interest payments are typically tax
deductible for those
who itemize their federal return. The danger of using home equity is that a
borrower might be tempted to extend the repayment period. While a new car loan
usually has a five- to seven-year term, a home equity loan can run 10 years or
longer."When you get into them, you have to have a plan to pay them
off," says John Gajkowski, co-founder of Money Managers Financial Group in
Oak Brook, Illinois. Otherwise, "the car ends up costing you a fortune
because of the carried interest."
investment properties. Boykin
is an advocate of opening a home equity line of credit in order to be able to
pounce on investment opportunities as they occur."It provides the
flexibility to get into a deal that you couldn't [otherwise] get into," he
properties, in particular, may only be available to those who are
able to make large down payments. Having a home equity line of credit open in
advance means buyers can quickly access the cash needed to close a sale.
However, Boykin isn't sold on the idea of using home equity to buy other
investments such as stocks and bonds.
your home. One of
the more common ways to use a home equity loan is to make renovations or
upgrades to a property. "There is an opportunity for a return on
investment," Liuzzi says. "You're improving an appreciating
asset." However, experts caution against funding a
home renovation for
financial gain alone. While improvements can increase the value of a house,
homeowners almost never recoup their full cost. Instead, use equity only for
renovations that will give you greater enjoyment or longer use of the property.
For instance, making a house more accessible so you can age in place or adding
a room for a new child so you won't have to move can both be smart uses of home
long-term care. Cash-poor
but house-rich seniors may be able to pay
for long-term care expenses with
their home equity. Reverse mortgages are specifically designed to provide older
Americans with an ongoing source of cash, but they can be complex and
restrictive. Regardless of whether a senior uses a home equity line of credit
or a reverse mortgage, Boykin urges people to be practical when it comes to
using capital for this purpose. "I am not a fan of getting a home equity
loan and using it for daily expenses," he says. For some, it might make
more sense to simply sell the property and downsize or move
to somewhere more affordable.
out a market downturn. The shift
from traditional pensions to 401(k)s and IRAs means a retiree's nest egg is
often subject to the whims of the market. Having a home equity line of credit
waiting in the wings can help limit financial damage during a recession.
"If you hit a hiccup in the market, rather than draw down a depressed
portfolio, we can use money from the [home equity]," Gajkowski says. As
with other investments, this strategy typically works best if you already have
a line of credit open. While there is a setup cost, it can be worthwhile if it
allows you to access cash immediately."It's a tool in your tool shed that
you can use when you need it, but you don't have to," Boykin says.
Borrowing against your home equity isn't something to be
undertaken lightly. However, when used for one of these purposes, it can be
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