While recovery from the 2008 housing crisis was slow to start, the housing market has been on an upward trajectory since rebounding in 2010. According to Gitnux.com, between 2010 and 2020, the average home equity in the United States doubled from $87,000 to $215,800. As of 2020, U.S. homeowners with a mortgage had an average home equity of $204,000. Investopedia.com also recently reported the average amount of home equity in the U.S. is at a record high with the average mortgage holder now owning $185,000 worth of equity.
What is Home Equity?
Home equity is the amount of money you own in your home. It’s the difference between how much your home is worth and how much you owe on your mortgage. This upward trend continued through 2022, with rising housing costs only recently beginning to simmer.
Cashing in on Your Home Equity
As a homeowner you might be thinking about the best ways to cash in on your home equity. You have three options when accessing your home equity:
- Cash-Out Refinance allows you to take out your equity by getting a new mortgage at a higher loan amount. However, with mortgage rates currently at historic highs, this should be a last resort.
- Home Equity Line of Credit (HELOC) is currently the most popular way to tap into your home equity. With a HELOC, homeowners can borrow money against their home equity, paying only on what you borrow with interest only payments.
- A Home Equity Loan is like a HELOC; however, homeowners receive the loan in one lump sum.
If you are going to cash out equity from your home, the most important thing is to “measure twice and cut once,” said Tim Regan, Uplend loan originator, powered by V.I.P. Mortgage, Inc. This means, make a list of all your wants and needs, figure out all you want to accomplish with the money and run the numbers to make sure you take out enough.
The No. 1 reason homeowners dip into their home equity is to consolidate or pay off high interest debt. Erasing other debt such as medical expenses, student loans, or even funding higher ed expenses before you incur debt is a great way to use your equity. Additional smart ways to use your home equity without impacting your long-term financial goals include:
- Home improvements – Remodeling and renovations are a great way to use the money to update your home and continue to build more equity in your home.
- Real Estate investing – Expanding your real estate portfolio can help you get ahead in the financial landscape.
Bad Ideas for Using Home Equity
Reconsider using your home equity for indulgences such as vacations, new cars, or other luxury items. Supporting your long-term financial goals is first and foremost. Always consider if what you intend to spend your home equity on does not align with your long-term financial goals, skip it.
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