When to use equity for cash

Graphic of a house merged with a bank

Chris Gus

In Spanish

If you’ve owned a home, you’ve probably made money since the beginning of last year. Amid a boom in real estate fueled in part by the pandemic, the amount of shares people held in their homes rose by almost 20% in the 12 months to March. That’s an average of $ 33,400 per home, according to CoreLogic, a research firm. And values ​​have risen from there. But while the value of your home has gone up, so does the daily cost. In addition, many employees have seen their pay cut. A possible answer? Utilizing the growing value of your home for cash. ,

However, you can not withdraw money from a house as you can from a bank. you will need to get a loan, which will have to be repaid. But with interest rates close to historically low, lending to your home can be a good idea, says Pittsburgh Financial Developer Diane Pearson – as long as you match the right loan with the right purpose and, realistically, you will be able to to return the money. Here are some pointers. ,

Why borrow γιατί and why not

Some serious reasons to borrow against your home include paying for home improvements, long-term or long-term care premiums, and raising cash so you can stay in a home you are not ready to leave. Some financial professionals also suggest using equity to pay for college or a second home, although there are other ways to pay for them without putting your home at risk.

It is generally not a good idea to borrow from your home to pay off unsecured debts, such as credit card balances or medical bills. Doing so, if you have problems, puts your home at risk for debts that could otherwise be repaid in bankruptcy. And while you can use your home for your daily expenses, if you are wealthy at home and poor in cash, this removes equity that you may need for care later in life or you may want to leave it to your children. ,

Be honest with yourself about whether you can afford the loan. All of your monthly debt payments (including non-mortgage loans) should not exceed 36 percent of your gross monthly income. If you’s retired and your loan payments would require you to increase the rate at which you withdraw money from a tax-deferred retirement account, borrowing is more difficult to justify, says Pearson. If you do not have a lot of money for future expenses, you can accept the tax blow and have a long-term goal, such as building a house that you plan to sell later, you will not have to spend your retirement funds to spend now.

And before you call your banker, know that the same price increase that increases the resale value of your home has caused some upheaval in the mortgage market. Home appraisers, cautious as prices rise rapidly, value homes less than homeowners and buyers think their homes are worth, says Amy Irvine, a financial consultant who works in Corning, New York and Parrish, Florida. . He finds that home resales come in at around $ 20,000 to $ 30,000 above prices and estimated values. This means that both new buyers and refinancing owners will be able to borrow less than a higher rating would allow.

This could prevent you from borrowing as much as you would like, but it should also protect you from the worst effects of the financial crisis of more than a decade ago. “People took stock – and the boom, the market was right,” Irvine recalls. “And boom, people were under water.” House prices could naturally fall, especially in areas with overheating. Therefore, there is a lot to be said to cover your new equity, especially if you do not have an immediate need for cash. ,

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