Mortgage Smarts: Understanding and Building Your Home Equity
Home equity is the value associated with a home, expressed in terms of dollars and cents. It’s a way for homeowners and banks alike to determine how much a house is worth for a sale and for borrowing purposes. One of the ways homeowners benefit from owning a home is they have access to this equity while they’re living in the house.
So-called “home equity loans” are loans against this valuation. But, many people don’t really know how to use home equity effectively or what its original purpose was. Knowing this can help you make better financial decisions and stay out of unnecessary debt.
The original purpose for home equity loans was to have money available to fix and repair the home. The loan could only be used for this purpose, and banks would revoke access to funds or take legal action against homeowners who did not use funds for their intended purpose.
Today, this has changed, of course, and banks allow you to use home equity for all sorts of things that have nothing to do with repairing your house. But, the best use is probably still maintenance of the residence. It’s about the only productive use of home equity, outside of starting a business or using the money for college.
Home improvements to the home, though, help build more equity. For example, when you take out a home loan to fix up the bathroom or remodel the kitchen, you are making the home more valuable. This added value gets tacked onto the selling price of the home.
You almost never get 100 percent of your investment back out of a remodeling job, but that’s OK because the appreciation you do get, coupled with the increase in the home’s value for other reasons, tends to make up for it.
For example, a home office remodel job has an average 52.6 percent return on investment. A new front door has a consistently high ROI – about 97 percent. Best of all, doors require very little maintenance. New siding is also a great upgrade, with an 85 percent ROI. A new deck has a high perceived value, with an ROI of about 83 percent. Windows typically give you 77 percent of their cost back in value, but they also add more value in energy savings. It’s actually possible to recover 100 percent or more of a replacement window project’s cost this way.
Finally, bathroom remodeling jobs can return up to 77 percent of the total cost – not bad.
Plus, you get a new kitchen, bathroom, or whatever else you did to the home for as long as you live there. That’s a real benefit, even if it doesn’t have a price tag on it. For most homeowners, this should be the first, and last, thing you do with your home’s equity. But, there are other things you can do with it, too.
Debt consolidation is another popular use of home equity. These days, people are drowning in debt. 28 percent of Americans today say they have more credit card debt than they do savings in the bank, so they couldn’t even pay off their debts if they wanted to. And, while 51 percent of Americans do have more emergency savings than credit card debt, this doesn’t count larger debts, like – wait for it – home equity loans and mortgages.
If you’re using home equity to consolidate debts, realize that you’re just shifting debts around. You will likely see a lowering of your total monthly debt payments, but this can be deceiving, because you still have a lot of debt to pay off.
A lot of people decide to take the savings and go back into debt or increase their living expenses. The right way to consolidate debts is to do the consolidation and then work towards building up savings – not paying down the mortgage.
Why not pay down the mortgage? Because any additional payments you send to the mortgage lender won’t help you if you get into financial trouble later on.
In other words, if you pay down the principal of the loan with additional payments over your normal mortgage payment, it does not absolve you from making future payments. Most people are baffled by this, but it’s true. Ask your lender.
Building up savings gives you options. You can use the savings for emergencies if you need it, or you can accelerate the payoff once the savings matches the mortgage remaining on the home.
For Supplemental Retirement Income
Reverse mortgages aren’t new, but many people are discovering them for the first time. You carry a mortgage for your entire life, why would you want to carry one into retirement? Because a reverse mortgage is one you don’t have to repay until you die or move out of the home.
This reverse mortgage Irvine specialist can walk you through a lot of the finer details, but basically a reverse mortgage gives you the ability to turn your home equity into a stream of guaranteed monthly payments.
Alternatively, you can use the equity to create an instant savings you can draw on as and when you need it. These mortgage products work best on high-value homes where appreciation is consistent and valuations are steady.
Author Bio: Matt Evans has worked in mortgage lending for nearly 20 years. In 2008, when the real estate market crashed, Matt decided to focus exclusively on helping seniors with reverse mortgages. He meets with each and every client face-to-face to answer questions and make sure they are comfortable with the major decision.