US housing prices are as high as ever – and the market is showing no signs of cooling. According to a Zillow real estate market report, average house prices in 46 of the country’s 50 largest underground areas rose by more than 10% in May compared to the previous year. And housing values have risen by more than 13% on average since last year. In June, the average price of housing in the U.S. was $ 385,000, compared to $ 342,000 in June 2020.
All of this may be worrying news for prospective home buyers – but millions of homeowners across the U.S. are benefiting from this unprecedented jump in property values. And there are many ways to leverage your equity, including a home equity loan, a line of credit, and cash refinancing. But just as important is the question of how best to harness that equity. In addition to describing some of my moves below, I interviewed homeowners from across the U.S. to explore different ways you can leverage your booming equity.
Renovate or remodel
You don’t have to sell it to take advantage of the value of your home. If you plan to stay in place, using equity for home improvements is a great way to make your space more habitable – and increase its value in resale.
In 2009, web designer and blogger Will Creech bought his 1956 mid-century modern home in Charlotte, North Carolina. “Back then, it was a little on the high side at $ 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 although they have discussed relocating or adding new upgrades in the future, Creech is generally pleased to stay where they are. “If the value continues to increase, 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 parquet, focusing on curb attractiveness, and replacing an old roof is the highest return on investment. And depending on which projects you choose, part of your loan interest may be tax deductible. See the IRS Guide on Qualified Deductions here.
Build a new home
I was one of millions of people who used their equity last year using a cash refinancing loan. Some used the money to create an emergency fund or pay bills. Others have used it to fund home renovations as opportunities to spend outside the home have narrowed. But I had my eyes 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 collected 20% in advance for a craft house outside the city, and over the next nine years we watched housing prices in our region double – and then triple.
We refinanced our original mortgage at a lower interest rate and deducted $ 500 from the monthly payment. Refinancing the payout added $ 400 to our monthly payment. In the end, we now pay $ 100 less per month to maintain mortgages at 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 domestic equity beyond the 20% threshold, now may be the right time to refinance. The high value of the house along with the low interest rate can open the door to new mortgage opportunities: you can shorten the loan term, reduce the monthly payment or cancel private mortgage insurance – a policy you only need when you have less than 20% equity in your home.
Jacqueline Sanchez made some of these moves. Real estate investor and co-owner of the personal finance website Invested Wallet bought her home in Omaha, Nebraska in 2015 for $ 209,000 – and its value has continued to rise since then. “According to Zillow, my home was worth $ 306,000,” he says. “By increasing the value, I refinanced to get rid of the mortgage insurance and shorten the loan term by five years.”
Buy an investment property
Being a landlord is a great way to earn passive income. If you have created equity through your primary residence, you can redirect some of this to buying a rental property.
Tawnya Redding bought her first home in suburban Portland, Oregon in 2015. “I worked hard to pay my mortgage ahead of schedule,” says a personal finance blogger. “This, combined with the drastic rise in housing prices in the area, gives me more than $ 250,000 in equity.” Redding intends to take the domestic equity credit line, or HELOC, when the time is right. “My plan is to continue to save, build equity and be prepared for when and if the market slows or reverses,” he says.
Pay for college
College is already so expensive, and the price of a four-year degree is expected to cost about $ 200,000 by 2036, Vanguard said. With your growing equity, you can help cover tuition costs in the future.
This is Alexander Lowry’s plan. “We bought our home in Hamilton, Massachusetts when I moved to the area to teach,” says Professor Gordon College and father of two. “We closed in February 2018 for $ 560,000, and our house is now valued at more than $ 700,000. I see the rise in value as an opportunity to pay for school for our girls.”
Lowry’s kids are toddlers now. But he plans to sell the home as they get closer to college age. But this is only one option when it comes to using equity to pay for education – you can also use cash refinancing or HELOC. The proceeds, however, can be poured into a tax-friendly 529 savings plan at the faculty or at the Roth IRA.
Sell your home and move
The most obvious way to cash in equity is to sell your home and channel the proceeds into a deposit for a new property. According to the National Association of Realtors, 6.5 million homeowners in the U.S. sold their property last year – the most since 2006. When you sell it, however, you will need new living space, which can be a big challenge. As we mentioned in our accompanying article, which describes ways to leverage equity, prices are high almost everywhere, competition is fierce and it is increasingly difficult to find an opportunity to arbitrate equity.
But this is not impossible. Perry Knight and his family sold their home in Tulsa, Oklahoma last year for 35% more than they paid in early 2017. Cycling enthusiast and blogger says the financial surprise was a great opportunity to relocate to Fort Lauderdale, Florida, to live closer family. “The market value was a big surprise for us,” Knight says. “We didn’t think about selling until we found we were in a very good position to do it. At the time, we had every intention of raising our family in Oklahoma.” The Knights paid cash for their home in Florida and were able to settle close to their relatives. They also managed to donate $ 10,000 after the transaction was completed.
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