If you’re a homeowner, you’ve probably made some money since the start of last year. Amid a real estate boom fueled in part by the pandemic, the amount of equity held in their homes increased by almost 20% in the 12 months ending in March. This averages out to $ 33,400 per home, according to CoreLogic, a research company. And the values went up from there. But even if the value of your home increases, the daily costs also increase. In addition, many workers have seen their incomes drop. A possible answer? Exploit the growing value of your home for money.
However, you cannot withdraw money from a house like you can from a bank; you will need to take out a loan, which will need to be repaid. But with interest rates near historic lows, borrowing against your home may be a good idea, says Diane Pearson, Pittsburgh financial planner – as long as you match the right loan to the right goal and, realistically, will be able to refund the money. Here are some benchmarks.
Why borrow … and why not
Some great reasons to borrow against your home include paying for home improvements, long-term care or long-term care insurance premiums, and fundraising so you can stay in a home you don’t. ‘re not ready to leave. Some financial professionals also suggest using home equity to pay for tuition or a second home, although there are other ways to pay for these without putting your home at risk.
It is generally not a good idea to borrow against your home to pay off unsecured debt such as credit card balances or medical bills. If you run into trouble, it exposes your home to debts that might otherwise be discharged in bankruptcy. And while you can use your home for everyday expenses if you are rich and poor in money, it takes away any equity you might need for care later in life or that you would like to leave to your children. .
Be honest with yourself about whether you can afford the loan. All of your monthly debt payments (including non-real estate loans) should not total more than 36% of your gross monthly income. If you’re retired and your loan payments require you to increase the rate at which you withdraw money from a tax-deferred retirement account, borrowing is harder to justify, Pearson says. Unless you have a lot of money for future expenses, can afford the taxes, and have a long-term goal, like repairing a house that you intend to sell later, you shouldn’t not deplete your retirement funds to spend now.
And before you call your banker, know that the same price increase that raises your home’s resale value has caused disruption in the loan market. Home appraisers, being cautious as prices rise rapidly, have valued homes for less than what homeowners and buyers think their homes are worth, reports Amy Irvine, a financial advisor who works at Corning, New York, and Parrish, Florida. She finds that home resales are about $ 20,000 to $ 30,000 above asking prices and appraised values. This means that new buyers and refinancing owners will be able to borrow less than a higher valuation would allow.
This might prevent you from borrowing as much as you want, but it should also protect you from the worst consequences of the financial crisis of over a decade ago. “People took stocks – and boom, the market corrected,” Irvine recalls. “And boom, the people were underwater.” House prices could of course go down, especially in overheated areas. So there is a lot to be said about sitting on your new net worth, especially if you don’t need the cash right now.