Peter Boys, Boys Financial Services

Good & Bad Reasons for Leveraging Home Equity

home equity

For many of us, our home is our most valuable asset. So it’s no wonder some might consider that any increase in their home equity is cash in the bank.  However, before deciding to refinance to access some cash or set up a home equity line of credit (HELOC), you need to consider what you want the money for. Is it to repair the roof, renovate, remodel, pay off credit card debt, finance someone’s education, or supplement your retirement income?  Depending on the intended use, you need to ask yourself whether it’s smart to use your home equity or not. As witnessed over the last decade, the housing market goes up or down, which begs an age-old question; should we consider our home to be an investment that we can leverage for retirement income or simply view it as a part of our overall cost of living expense?

The answer depends on how much equity we have built up in our home prior to retirement, and what we estimate our ongoing retirement expenses might be. In the past, traditional thinking was that home equity created savings for the retirement years plus also an inheritance to pass on to our children.

Before the financial crisis of 2008, homeowners used refinancing to pay other debt, to finance home improvements, and pay for vehicles, education, medical expenses, taxes, real estate, or stock market investments. Unfortunately, more recent trends show an inclination to spend rather than build equity, with homeowners taking out HELOCs during the good times of increasing home values and historically low interest rates.

Smart choices can include using the funds for home improvement projects which can add value. But that depends on the project. Things such as kitchen and bathroom updates, finishing a basement or building a garage top the list of offering the best return.

Some people may be tempted to tap into their home equity to invest, especially in this time of historically low interest rates. But this can be risky with today’s volatile markets, whereas tapping into home equity to start a business or upgrading your education may be a better choice.

Others may choose reverse mortgages, which allow seniors to borrow against their home equity without making payments, with the funds paid back to the lender when the home is sold. There are a number of different options available on the market today, so do your research and check out the up-front costs and fees before jumping in.

One no-no is leveraging your home equity to pay off credit card debts. It may seem like a logical way to get rid of high interest debt, but why replace unsecured credit card debt with secured mortgage debt? I would only suggest doing this if there is no other alternative available, as credit card debt is easy to run up again!

Some people might view a low interest home equity loan as an alternative to holding a lot of cash in a low interest rainy savings day account. But like many seemingly simple ideas, if not monitored it could trigger a quick path to home foreclosure.

I would strongly suggest that if you are considering a reverse mortgage or home equity line of credit to review your plans with trusted financial advisor first.

 
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