If you’re like most Americans, your home is your most valuable asset. Your home can also help ensure you have the equity you need to accomplish your financial goals.
Here are three examples of the role your home equity can play at different stages of your life.
First-time home buyerTamara has just bought her first house and it’s perfect: A porch, tiny backyard for her dog Max and not too far from work. She’d love to re-do the outdated kitchen cabinets, but she’s decided to wait until she’s paid off a chunk of her mortgage and built up some home equity. Then, she plans to apply for a low-interest home equity loan to help cover the cost of the project.
If you’ve recently bought your first home, congratulations! You’ve made a significant step toward building equity that you can use in your overall financial plan later in life. When you pay off your home, you not only acquire a place to live, but you also start building a source of personal wealth that can help you in the future as your home equity grows.
Mature homeownerJaya and Nirmal have been living in their home for 20 years and their mortgage is nearly paid off. Building up equity in their home has always been a central part of their financial plan, but so too has been knowing they can draw on that equity in times of need. That’s why they set up a home equity line of credit at the same time they took out their mortgage. Now, having just learned that their daughter has been accepted into medical school, they’re able to use their low-interest line of credit as a source of financing to help pay for her tuition.
If you’ve been living in your home for a while and have built up some solid equity, unlocking some of it can provide you with financial options. For example, if you’re a parent, you could use it to help your children pay for their education.
Heading into retirementDoug and Barb plan to retire next year and are looking forward to having more time to travel and enjoy leisure pursuits. By taking out a home equity line of credit on their fully-paid-off home, they can draw extra funds when they need them. Eventually, they plan to sell their home, purchase a smaller retirement home and use the remaining profit to supplement their pension.
Many retirees find their pensions or retirement savings plans aren’t enough to achieve their retirement lifestyle goals. Drawing on their home equity can allow retirees to take advantage of one of their biggest assets - their home equity.
Whatever life stage you’re in, you may want to consider your home equity as part of your overall financial plan. One note of caution with any type of home equity loan: the collateral is the house. That means, if you default on the loan for some reason, you can lose your home. Before getting a home equity loan, be very sure that you can afford the monthly payments.