House prices in the US are as high as ever – and the market is showing no signs of cooling. According to a report from the Zillow real estate market, average house prices in 46 of the nation’s 50 largest metropolitan areas grew by more than 10% in May compared to the previous year. And home values have risen by more than 13% on average since last year. In June, the median home price in the United States was $ 385,000, compared to $ 342,000 in June 2020.
All of this can be disturbing news for prospective home buyers – but millions of homeowners across the United States are benefiting from this unprecedented increase in home values. And there are many ways to tap into their home equity, including home equity loans, line of credit and cash refinancing. But just as important is the question of how best to leverage that equity. In addition to outlining some of my own steps below, I’ve interviewed homeowners from across the United States to explore the different ways you can take advantage of your thriving home equity.
Renovate or remodel
Exploiting the value of your home does not require you to sell it. If you plan to stay in one place, using your equity for home improvement is a great way to make your space more livable – and improve its resale value.
In 2009, web designer and blogger Will Creech bought his modern mid-century home in 1956 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 much of their equity in home renovations, and while discussing moving or adding new improvements in the future, Creech will generally be happy to stay where they are. “If the value continues to rise, I personally prefer to do nothing,” he says.
Some renovation projects can add more value to your home. According to a Homelight study, the refurbishment or installation of hardwood floors, which focus on the appeal of restraint and the replacement of an old roof, have the highest return on investment. And, depending on which projects you choose, a portion of your loan interest may be tax deductible. See IRS guidance on qualified reductions here.
Build a new home
I was one of the millions of people who took advantage of their home equity last year using cash-out refinancing loans. Some have used cash to create an emergency fund or pay bills. Others have used it to fund home renovations, as out-of-home spending opportunities have dwindled. But I had my 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 put together a 20% down payment on a craft house outside the city and saw over the next nine years that house prices doubled – and then tripled – in the region. our.
We refinanced our original mortgage at a lower interest rate and removed $ 500 from the monthly payment. Cash refinancing added $ 400 to our monthly payment. Finally, we are now paying $ 100 less a month to keep the mortgages on our primary residence and vacation home in Chelan, Washington, where we will live after we retire.
Get better mortgage terms
If a boost in valuation has expanded your home equity beyond the 20% threshold, now may be a good time to refinance. A high home value 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 mortgage. Private mortgage insurance – a policy that you are required to have only when you have less than 20% equity in your home.
Jacqueline Sanchez made some of these moves. The real estate investor and co-owner of Invested Wallet, a personal finance website, bought her home in Omaha, Nebraska, for $ 209,000 in 2015 – and its value has grown since then. . “According to Zillow, my house was worth $ 306,000,” she says. “With the increase in value, I refinanced to get rid of the mortgage insurance and reduced the term of my loan by five years.”
Buy an investment property
Renting a home is a great way to earn a living. If you have built equity through your primary residence, you may divert part of it to the purchase of rental property.
Tawnya Redding bought her first home in a suburb of Portland, Oregon, in 2015. “I worked diligently to pay off my mortgage before it was scheduled,” says the personal finance blogger. “That, coupled with the sharp rise in house prices in the area, will have me sitting on more than $ 250,000 in equity.” Redding is planning to take out a home equity line of credit, or HELOC, when the time comes. “My plan is to continue to save, build equity and be prepared for when and if the market will slow down or turn around,” she says.
Pay for college
The college is already expensive, and the price of a four-year degree is expected to be around $ 200,000 by 2036, according to Vanguard. You can use rising home equity to help cover the cost of tuition in the future.
That’s Alexander Lowry’s plan. “We bought our home in Hamilton, Massachusetts, when I moved to the area to teach,” says Gordon College professor and father of two. “We closed in February 2018 for $ 560,000, and our home is now valued at over $ 700,000. I consider the increase in value as the opportunity we pay for college for our girls.”
Lowry’s children are now young children. But they plan to sell the house once they are closer to college age. But that’s only one way when it comes to using equity to pay for education – you can also use cash-out refinancing or HELOC. And you can pour the proceeds into a savings plan for the 529 tax-advantaged college or Roth IRA.
Sell your home and move
The most obvious way to convert your equity is to sell your home and put the proceeds into a down payment on a new property. According to the National Association of Realtors, 6.5 million American homes sold their properties last year – the highest number since 2006. Once you sell, however, you need a new place to live, which can be a significant challenge. As we noted in our accompanying article describing the ways to exploit home equity, prices are high almost everywhere, competition is fierce and it is increasingly difficult to find an opportunity to trade equity equity. -but.
But not impossible. Perry Knight and his family sold their home in Tulsa, Oklahoma, last year for 35% more than they paid for it in early 2017. The cycling enthusiast and blogger says the unexpected financial gain presented a perfect opportunity to relocate to Fort Lauderdale, Florida, to live closer to family. “The market value came as a big surprise to us,” Knight says. “We didn’t think we were going to sell until we realized we were in a very good position to do that. 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 live next door to their relatives. They also managed to set aside $ 10,000 after completing the transaction.
Find the Best Refinance Rates with the CNET Rate Alert
Add your email and Zip Code to receive the latest verified refinancing rates. Delivered daily!