If you’ve owned your home for a year or more, chances are you’re sitting on a significant amount of equity (the difference between the value of your home and what you currently owe). Equity in your home increases as you make your monthly principal payments, but it also increases as your home appreciates…and homes have definitely been appreciating rapidly over the past couple of years!
According to CoreLogic’s Homeowner Equity Insights Report:
- The average equity gain of mortgaged homes in Florida during the past year was $26,000
- The current average equity of mortgaged homes is greater than $216,000
- There was a 6% increase in total homeowner equity over the past year
This is great news for you as a homeowner. In addition to being your tool to build wealth, your equity gives you options and flexibility. Below, I’ve listed a few things you can do with the equity in your home. Of course, you can always just sit back and watch it increase – but is that really doing anything to help build your wealth or prepare you for retirement?
I might be biased, but this is the perfect time to consider selling your home if you have a decent amount of equity. If the pandemic has taught us anything, it’s that we need to be content with our homes as we’re forced to spend a lot more time in them. While inventory has been low the past few years, we are seeing a slight increase since May, and if you’re considering selling, it’s a great time to get in before there’s too much competition. If you’re worried about finding a place to move, many home sellers are using a “Sell and Stay” option, where you sell your home, then lease it back from the new owners until you find your next home. It takes a bit of the pressure off.
This is a great option if you’re looking to reduce your payment, get rid of your Private Mortgage Insurance (PMI), or pull cash out to make improvements.
If you’re pulling cash out, it’s important to do your research. In general, you can take out as much as 80% of your home’s equity. But how much you take out depends on your personal financial situation. If you have some income stability and you’re using money to improve the home’s value, or make the home more livable so that you are able to stay in it longer, this option makes a lot of sense. Some renovations have more resale power than others. A kitchen or bathroom renovation will nearly always net you more money on your sale – sometimes equal to or greater than your initial investment. A swimming pool, though, sees very little return on investment, but may make sense if you really want a pool to enjoy your house more.
One thing to remember, if you pull cash out for anything that doesn’t improve your home, you’ll no longer be eligible for the mortgage interest deduction on your taxes. So think twice before using the cash to purchase a new car or pay other expenses.
Pay off Consumer Debt
Another way to use the equity in your home is to pay off high-interest debt. You may have a high-interest car loan, or credit card or student loan debt, and you can take advantage and reduce the overall interest you’re paying.
Purchase an Investment Property
Again, I’m biased here, but the financial security and stability of owning an investment property is incredible. If you have $26,000 of equity available for cash-out in your home, you can use it to make a 20% down payment on a $130,000 investment home. You’ll want to do your homework and find a home that will cash flow within the first couple of years with minimal improvements. But once the loan on your investment is paid off, that’s passive income you’ll receive as long as you own the property, and the property itself is an asset you can pass on to your kids. Improvements to investment property are also tax-deductible, so that’s another bonus.
It’s important for you to discuss these options with your financial advisor or tax professional before you take any action. And of course, if you’re looking to sell and stay, move in to a new home, or purchase an investment property, let me know. We have a free home valuation tool, and a fully-customizable home search tool on our website.
If you’re thinking of refinancing, after years of working with various local and national lenders, we’ve teamed up with America’s Money Source, and they provide the best options and service available. Click here to start an application.