Mortgage

How do you greatest use your individual residence? (Podcast)

Many homeowners in the US are rich in equity

As home prices rise, so too does home equity.

The average U.S. homeowner saw their equity grow by approximately $ 33,400 between early 2020 and early 2021 alone.

When accessed via a cash out refinance or other loan product, this home equity could seriously improve your long-term finances and overall wealth.

Here, mortgage advisor Arjun Dhingra explains some of the best ways you can use your equity.

Verify Your Eligibility to Withdraw Home Equity (August 31, 2021)

Hear Arjun on The Mortgage Reports Podcast!

First things first: Use your home wisely

We're not saying you should cash out your home equity and go shopping or take an expensive HELOC for a fancy vacation.

Instead, we're going to discuss ways you can use this equity to actually improve – not hurt – your financial situation.

As mortgage advisor Arjun Dhingra recently said on an episode of The Mortgage Reports Podcast, “I know some of you think this seems eerily familiar 10 years ago when everyone used their equity to write off assets like boats and cars and others Stupid wasted spending. We're not talking about that here. "

He continues, "These are responsible ways that you can use your money constructively to do better financially."

With that in mind, here are four of the best ways to turn your home equity to your advantage.

Verify Your Eligibility to Withdraw Home Equity (August 31, 2021)

1. Use your equity on home improvement projects

Home renovations have grown dramatically in recent years, with around $ 420 billion spent in 2020 alone.

With such a small (and so expensive) supply of homes for sale, many homeowners are choosing to remodel their existing properties instead.

As Dhingra puts it, "More and more people are realizing that they can't really sell their house because they have nowhere to go where the market price is."

As a result, homeowners get creative.

They use their home capital to create space, install new devices or smart home technologies, or adapt their properties to their current needs. This could include adding a home office, creating a pool or gym, or installing an outdoor kitchen or fire pit for entertainment.

Whether you are using a cash out refinance, home loan, or HELOC, reinvesting the money in home improvement is one of the best ways to get a return on your investment.

2. Pay off high-interest debts with equity

The average American has credit card debt of around $ 5,300. These debts usually come with sky-high interest rates – often 18% or more.

Fortunately, mortgage loans offer much lower interest rates. In many cases, borrowers can get interest rates as low as 3% (or even better if their credit scores are great).

With a cash-out refinancing, you have the option of exchanging your high-interest debt for a low-interest one.

This is known as "debt consolidation refinancing". It can significantly reduce your monthly payments and save a lot of money in the long run if done right. You just:

Refinance your mortgage with a higher balance, use the difference in cash, then use that lump sum to pay off credit cards, personal loans or other debts

This will essentially add your higher-interest debt to your mortgage and allow you to pay it off – cheaper – over time.

"The average US consumer sits on credit card debt that could reach double-digit interest rates," Dhingra said.

“Withdrawal refinancing rates are much, much lower and in many cases still around 3%. So when you consolidate this debt or add it to your mortgage, you not only save money every month, but now you also make this debt tax deductible, ”he explains.

The last bit is a nice added perk.

Mortgage loan interest can be deducted from your annual tax return (provided you break it down). Interest on credit card debt, auto loans, and other types of high yield debt products are non-deductible.

3. Invest your home equity

Investing in stocks, bonds, real estate, and other assets can be another smart way to capitalize on your home equity.

Think of it this way: suppose you run a cash out refinance and tap about $ 20,000 in equity at 3% interest. If you can invest that $ 20,000 in an index fund that returns 6% annually (the expected average for the next 10 years according to Goldman Sachs), you could offset those borrowing costs and make extra cash – or top up your retirement fund – at the same time.

"Some people have withdrawn equity and either increased their contribution to their retirement accounts or invested more money in stocks or other types of illiquid holdings," Dhingra said.

You might also consider using the money to buy additional real estate – especially investment properties that can provide residual income (like rentals, Airbnbs, vacation homes, etc.).

The money withdrawn can be used for a down payment or, if you have enough equity, for the direct purchase of another property.

This strategy could generate monthly income from rent payments as well as long term wealth from the extra home equity that you would gain.

4. Use equity to top up your emergency fund

"COVID taught us that the unexpected can happen," said Dhingra.

In order to be financially prepared for these unexpected times, it is important to stash at least six months of expenses. In the event of a job loss or other emergency, you can easily cope without putting your home or other assets at risk.

"You should be able to comfortably make six payments to settle all of your necessary bills and debts and maintain your current standard of living," said Dhingra. "This is a real emergency or rainy day fund."

If you haven't saved those six months of spending, your equity could help here. Ideally, you put the money in a high-yield savings account that will grow over time.

Verify Your Eligibility to Withdraw Home Equity (August 31, 2021)

How do I get my home equity?

Home equity is an illiquid asset – that is, it's not cash that you can spend. It is tied to the value of your home.

To convert that equity into cash, you need to take out a loan against the value of your home. There are three main methods of doing this:

Cash-out refinancing – The cash-out refinancing replaces your existing mortgage with a new, larger loan. The new loan will be used to pay off your existing mortgage balance and the “extra” amount will be refunded to you as cashback on completion (minus your closing costs). Home loan – A home equity loan is a type of "second mortgage". That means you can keep your existing mortgage and take out a second, smaller loan against your home equity. Home loans usually have fixed interest rates Home Equity Lines of Credit (HELOCs) – A home equity line of credit is another type of second mortgage. HELOCs usually have variable interest rates and operate as a revolving credit line. This means that you can borrow from your equity up to a certain credit limit, pay it off, and then borrow again during a set "draw period". You then have a fixed repayment period to pay off the remaining balance

Each of these strategies has advantages and disadvantages. Which one is right depends on your remaining term and credit balance, your current mortgage rate, and your personal finances.

A mortgage loan officer or financial advisor can help you select the right loan product to meet your goals.

Use your equity

If you're like most American homeowners, you're probably sitting on good equity.

If you do decide to take advantage of it via a cash out refinance or a home loan, make sure that you are doing so for the right reasons.

Just as there are many ways to improve your finances by using your home equity, it could hurt them too. Avoid tapping into your equity for unnecessary expenses and speak to a financial expert or mortgage advisor before taking any action. They can help you make the best decision for your budget.

"It's really important that you connect with a real mortgage advisor on this matter – not just an everyday loan officer or e-lender," said Dhingra.

“That is an important topic. It's your money, and when it comes to your finances and the bigger picture of your wealth, this is a key topic that you want real, real advice on. "

Confirm your new price (August 31, 2021)

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