July 15th, 2017 8:20 AM by Jackie A. Graves, President
If you bought a home recently, it may already
have increased in value. Equity growth goes hand-in-hand with pride of
ownership (and fun stuff like tax breaks) when it comes to homebuyer goals, so
say a big, "Yay!"
"Nearly 91,000 homeowners regained equity in the first
quarter of 2017, according to real estate data firm CoreLogic's latest housing
Realtor.com. "Since the end of the most recent housing crisis,
9 million owners in total have regained equity, the report notes. About 63
percent of all homeowners have seen their equity increase since the first
quarter of 2016, with the average owner gaining about $13,400 between then and
the first quarter of 2017." According to Frank Martell, president and CEO
of CoreLogic, that's the "largest increase since mid-2014."
before you go making plans for all that equity, either by doing a cash-out
refinance (if possible and prudent) or getting a home equity loan, take a
pause. That money may be best left right where it is. If you still want to tap
that equity, here are some of best - and worst - ways to use it.
your home has equity, it can be tempting to use it for home renovations, which,
presumably, will further raise your home value - or at least make your home
prettier or more functional. Knowing which renovations pay you back is key to
making smart choices. Review Remodeling magazine's Cost vs. Value
Report, which "compares average cost for 29 popular remodeling
projects with the value those projects retain at resale in 99 U.S.
markets." You can then take your research further, viewing data for your
regional area. This will help you decide if that $50,000 kitchen is a good
investment, or if that attic renovation you were considering will be a bust
from an ROI standpoint.
A new car
fancy new car is calling your name, right? Does it make sense to use some of
your home equity to finance or buy it outright? Ask yourself this: Is this a
car you can't afford without using your home equity? Can you afford to pay the
difference in your current monthly payment and what will be your new payment -
plus the monthly cost of the car?
the housing bubble, consumers used home equity borrowing to pay for everything
from boats and gambling junkets (clearly bad) to cars and kitchen renovations
(not so bad), said
Interest.com. "The problems these homeowners experienced during
the financial crisis and recession taught us that even some ‘not so bad'
spending should be scratched from our list of acceptable uses. So, while we
used to say that financing a car with a HELOC was OK, we no longer believe
that. Besides, auto loans are
now one of the few types of consumer loans that are cheaper than home equity
loans or lines of credit."
on to a home can be a great way to make it more livable, especially if the
space is inadequate for your family. The Cost vs. Value Report can be useful
here, too. You might be surprised to learn that a midrange bathroom addition
typically only pays back an average of 53.9%. But, if you bought an older home
that only has one bathroom, adding another could have a much higher ROI that
makes the addition worth it.
it comes to larger undertakings, "Studies show that nearly all of the
cost of a mid-range two-story addition may be recovered at the time
of sale," said The Spruce.
"The key here is ‘may be recovered,' as there is no predicting the real
estate market years in advance. While this might seem like a ‘no-brainer,' it
needs to be mentioned. More space means higher heating and cooling costs,
more windows to wash and gutters to clean, increased property taxes, and
more house to clean. Even though additions offer the potential for higher
cost-value ratios than other renovation projects, you still may not recover the
full cost of the addition when you actually sell."
European cruise or trip to Machu Picchu sounds like a great idea, especially
because you've got some cash to pay for it with the rising equity in your home.
But consider this: You may be paying back the money you spend on that vacation
long after you return home.
first mistake is using your home equity line of credit to live above your
means," said Fidelity. "That can be paying for a vacation, using it
to support going out to eat, buying luxury goods, or more generally, spending
what you don't have. This risk is very similar to the risk of running up too
much credit card debt, except that making this mistake with your home equity
line of credit affects more than just your credit rating: It puts your home at
More real estate
one property for another is a tricky proposition. Whether you're thinking about
flipping a house for the first time or already have some experience under your
belt, you'll want to weigh the pros and cons - and costs - involved in buying
and owning two properties.
some of your home's value to pay for a second home has its advantages - but it
has some big drawbacks too," Greg McBride, a senior financial analyst for
Bankrate.com, told CNN Money.
"Lenders tend to give more favorable terms to those who tap their home's
equity to pay for a second home because they have more skin in the game. Buyers
who take out a separate mortgage on a second home are more likely to stop
making payments if they run into financial trouble and default. To offset the
increased risk, banks charge higher rates and require larger down payments of
these borrowers. The costs of borrowing, especially on home equity loans, can
be lower as well, since these loans don't involve paying for title searches or
insurance and other transactional costs of new mortgages."
for the negatives: "By tapping your home's equity you'll be
increasing your monthly mortgage payments and increasing the risk of losing
your primary home to foreclosure.
by buying another home you're tying up a lot of your money into one type of
asset. You're putting a lot of eggs in the real estate basket."
the cost of college continuing to rise and mortgage rates reaming near historic
lows, homeowners are increasingly looking to their home equity to offset some
of the costs of education. Here's why it may be a good idea: "With a home
equity loan or a home equity line of credit, the two biggest positives are that
home equity loans may be cheaper than other loans, plus the interest paid on a
home equity loan is tax deductible," said HSH.com.
The most important downside: You're using your home as collateral. And then
there's this: "These loans don't typically offer flexibility during
periods of financial hardship," they said. "But those who borrow with
federal student loans can readily obtain loan deferments, forbearance, and sometimes
even loan forgiveness."
Written by Jaymi Naciri - To view the original article click here