House prices in the US are as high as they have ever been – and the market is showing no signs of cooling. According to a report from the real estate market Zillow, average house prices in 46 of the 50 largest metro areas in the country rose by more than 10% in May compared to the previous year. And house values have risen by more than 13% on average since last year. In June, the average house price in the United States was $ 385,000, compared to $ 342,000 in June 2020.
All of this may be troubling news for potential home buyers – but millions of homeowners across the U.S. are benefiting from this unprecedented jump in home value. And there are many ways to leverage your equity, including an equity loan, a line of credit, and cash refinancing. But equally important is the question of how best to use that capital. In addition to outlining some of my moves below, I interviewed homeowners across the U.S. to explore different ways you can take advantage of your booming asset capital.
Renovate or remodel
Exploiting the value of your home does not require selling it. If you plan to stay in place, using your capital to improve your home is a great way to make your space more comfortable to live in – and increase its resale value.
In 2009, web designer and blogger Will Creech bought his modern 1956 home in Charlotte, North Carolina. “At the time, it was a little on the high side of $ 270,000, but now it’s worth $ 500,000,” he says. Creech and his wife have invested most of their capital in renovating their homes, and as they discuss relocating or adding new upgrades in the future, Creech is generally pleased to stay where they are. “If the value continues to grow, I personally would rather not do anything,” he says.
Some renovation projects can add more value to your home. According to a Homelight study, repairing or installing hardwood floors, focusing on curb appeal and replacing an old roof have the biggest return on investment. And, depending on which projects you choose, part of your interest on the loan may be taxable. See the IRS Guide to Qualified Deductions here.
Build a new home
I was one of millions of people who used their housing capital last year using a cash refinancing loan. Some used cash to create an emergency fund or pay bills. Others have used it to fund home renovations, as spending opportunities outside the home have narrowed. But I cast an eye on retirement.
When I moved to Seattle in 2012, I was shocked by the already expensive and competitive real estate market. My husband and I raised 20% to pay for a craft house out of town and watched over the next nine years as house prices doubled – and then tripled – in our region.
We refinanced our original mortgage at a lower interest rate and deducted $ 500 from the monthly payment. Cash refinancing added $ 400 to our monthly payment. Finally, we now pay $ 100 less per month to maintain mortgages on our primary residence and holiday home in Chelan, Washington, where we will live after retirement.
Get better mortgage terms
If an increase in valuation has increased your capital above the 20% threshold, now may be a good time to refinance. The high value of a home combined with a low interest rate can open the door to new mortgage opportunities: you can shorten your loan term, reduce your monthly payment or cancel your private mortgage insurance – a policy you only need when you have less than 20% equity in your home.
Jacqueline Sanchez made a few of these moves. Real estate investor and co-owner of Invested Wallet, a personal finance website, bought his home in Omaha, Nebraska, for $ 209,000 in 2015 – and its value has continued to grow since then. “According to Zillow, my home was worth $ 306,000,” she says. “With the increase in value, I refinanced myself to get rid of mortgage insurance and reduce the loan term by five years.”
Buy an investment property
Being a landlord is a great way to earn passive income. If you built capital through your primary residence, you could divert some of it to buying a rental property.
Tawnya Redding bought her first home in suburban Portland, Oregon, in 2015. “I worked hard to repay the mortgage before the deadline,” says the blogger about personal finances. “That, combined with the drastic increase in house prices in this area, makes me have over $ 250,000 in capital.” Redding plans to raise an equity line or HELOC when the time is right. “My plan is to continue saving, building capital and being ready when and if the market slows or reverses,” she said.
Pay for college
College is already expensive, and the cost of a four-year degree is expected to cost roughly $ 200,000 by 2036, according to Vanguard. You can use your growing capital to cover tuition costs in the future.
That’s Alexander Lowry’s plan. “We bought our home in Hamilton, Massachusetts, when I moved to the area to teach,” said Professor Gordon of College and father of two. “We closed in February 2018 for $ 560,000, and our house is now valued at over $ 700,000. I see the increase in value as an opportunity to pay for college for our girls.”
Lowry’s kids are little kids now. But he plans to sell the house when they are closer to college age. But this is only one time when it comes to using capital to pay for education – you can also use cash refinancing or HELOC. And you can pour the proceeds into a 529 savings plan at more tax-paying colleges or the Roth IRA.
Sell your home and move
The most obvious way to cash in your capital is to sell your home and invest the income in a payment for a new property. According to the National Association of Real Estate Sellers, 6.5 million U.S. homeowners sold their properties last year – the most since 2006. However, when you sell it, you will need a new place to live, which can be a significant challenge. As we noted in our accompanying article describing ways to capitalize on share capital, prices are high almost everywhere, competition is fierce, and it is increasingly difficult to find an opportunity for ownership arbitration.
But that is not impossible. Perry Knight and his family sold their house in Tulsa, Oklahoma, last year for 35% more than they paid in early 2017. Cycling enthusiast and blogger says the financially incredible income was the perfect opportunity to relocate to Fort Lauderdale, Florida, in lives closer to family. “Market value was a big surprise for us,” Knight says. “We didn’t think about selling until we realized we were in a very good position to do that. We had every intention of raising our family in Oklahoma at the time.” The Knights paid in cash for their home in Florida and were able to settle near their relatives. They also managed to set aside $ 10,000 after the transaction was completed.
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