At this point, I am sure you have heard something to the effect of "your home is worth more now than it ever has been before." In most cases, this is probably true given the recent years of extreme market appreciation, both locally here in Rochester, NY and on a national level. If you are in a position where you have no desire or need to move or sell your home, then this chatter probably goes in one ear and out the other. Even if you are not looking to make a move, there are other ways to take advantage of the equity in your home without selling and cashing out! Before we get started, let's make sure that we understand that equity can simply be defined as what your home is valued at less what you owe against it, typically your mortgage balance.
Here are 5 ways that you can use the increased equity in your home to your advantage:
1) Remove PMI From Your Mortgage
If the original purchase of your home was done via a mortgage with less than a 20% downpayment, then you were and potentially still are being charged PMI (private mortgage insurance) by your lender on a monthly basis. With most conventional mortgage loan products, the PMI charges will go away once you reach a 20% equity stake. Contact your mortgage lender to see if this is the case for your loan, and if it is then ask them if you can go through a process to drop the PMI if you pay for an appraisal to get done where the result would show that the appraised value is 20% or higher than what your loan balance is. If that is the case then your PMI payments should drop off because you hit the magic number. The win here is that with the increase in values lately you probably have reached a 20% equity mark quicker than you would have if you just kept paying down the loan principal each month over time to reach it. Keep in mind this may not apply with all loans, but it could save you a good chunk each month (around $50-100 each month as a common example).
2) Home Equity Loan
Most lenders will give you a loan for 80% of the equity that you have in your home, some even higher. This loan product can be used to tap into the equity in your home in return for cash that can be used for home repairs or upgrades. You will then have a monthly payment for the loan until it is paid off. Example of how the numbers work... say your home appraises for $200k, and you owe $100k on your current mortgage. In this case, you would have $100k in equity, and if you work with a lender that is willing to loan up to 80% of that equity then you could have $80k available to you to use for what is needed from there and would pay it back in monthly installments or when ready to pay off it off completely.
3) Home Equity Line of Credit (HELOC)
Similar scenario to the Home Equity Loan, however in this case you have access to the cash to use but you don't have to use it or withdraw it all at once, or even at all if it is not needed. With home values at record highs, this is something that every homeowner should look into even if you do not need the extra cash. Think of it as a rainy day or emergency fund sitting there ready for you to withdraw from. Once you use the money, interest accrues until the loan balance is paid off.
4) Refinance Your Mortgage to a Lower Rate
Yes, interest rates are on the rise, but they are still historically low. If you have owned your home for 5 years or longer, chances are that you still have the opportunity to capitalize on a lower interest rate than what you have now. Unfortunately, at this point, you missed the boat to have an obnoxiously low-interest rate but you could still save yourself a good amount of interest money that would be paid if you have long-term plans to stay in your existing home. You could also look at a "cash out, refi" and pull some of the equity out of your home, and put cash in your pocket by refinancing your mortgage terms and starting with a new loan.
5) Increase Your Net Worth
Keep in mind, we are talking about your home as an asset. The more your home is valued at, and the less that you owe on it, contributes to your overall net worth. You can also use the equity in your home, via some of the options above, to make additional investments that would increase your overall net worth as well.
Please understand that these are opinions only, and to consult with a financial planner/adviser, accountant, and/or mortgage lender to see if any of these options would be a fit for your personal financial situation.
