The ingredients are there. Property values have been increasing, and your house is an asset. Considering how active the real estate scene has been in the past year, your home’s value as an asset may have increased, and it could be time to consider putting your home’s equity to work for you.
I’m not talking about using it as a piggy bank like what many people were doing before the 2008 market crash. I’m talking about using good reasoning and common sense analytics to determine the value and benefit of accessing equity in your home. Banks are still cautious with lending and require a minimum of 10 to 15 percent equity remaining for loans being utilized to pull equity from a home.
Let’s start at the beginning. What is equity? Equity is the amount equal to the difference between the home’s value and the liens held against it. It’s expressed as both a dollar amount and a percentage.
In this example, let’s allow for 15 percent equity to remain; a total of 85 percent of the home’s value is eligible to be financed. Usable equity would be the amount available after factoring in existing lien amount(s). See below where we use the above house’s value as an example.
Determining the amount of usable equity is important in making a decision about what it can be used for. In most cases, utilizing equity typically involves things like debt consolidation, home improvements, college tuition, and other education-related expenses.
Once you have the amount and the purpose of the equity targeted, it’s wise to consider what alternatives you have. Doing so can give you a good comparison to help reach common sense decisions. In that spirit, here are some ways people typically utilize the equity they’ve tapped into:
Debt consolidation: Consolidating debts is a great financial tool unless debt behaviors remain unchanged. Consolidating debt only to acquire more debt is extremely problematic since you haven’t actually eliminated any debt, so make sure you consider your credit habits.
Home improvements: Are the improvements true upgrades or deferred maintenance? Depending on what projects you have in mind, consider the realistic rate of return associated. Some projects may yield a dollar-for-dollar return while others may yield nothing, and that’s okay. Home improvements don’t always have to be big and shiny. Some simply make a home more livable and stress-free, and that’s great too!
College education: Student loans can be extremely expensive, and it’s smart to determine if they’re a more affordable option versus leveraging home equity. Accessing equity involves underwriting and a property valuation, and it can be done with refinance loans or via lines of credit in a secondary lien position, assuming you already have a lien in the first position. There are many things to consider when determining the value and benefit of using your home’s equity, and lending conditions are still optimal with current market rates. Now is a great time to get started, but make sure you don’t get muscled into applying for something before you get to have a detailed, analytical discussion with a qualified loan officer.
This weekly Sponsored Column is written by Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.
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