Home values nationally have been rising since the end of 2011. Over that same time period, homeowners have steadily reduced the amount of mortgage debt they owe. Put these two trends together, and it adds up to an increase in the amount of home equity available to Americans. The question now is, how to put that equity to good use?
The S&P/Case-Shiller National Home Price Index has risen by about 24 percent since the end of 2011. Figures from the Federal Reserve show that mortgage debt on primary residences is down by more than $300 billion since then. As the value of properties rises and debt on those properties declines, it means that the owners of those properties have more equity at their disposal. The only catch is this: some of the distress of the housing crisis was caused by over-borrowing against equity. Home owners need to pick their spots and only use this valuable asset for practical uses.
5 Practical Uses for Home Equity
Borrowing against real estate equity is one of the cheapest forms of financing available. Therefore, if you need to borrow, home equity loans and lines of credit can be the smartest way to do it. Here are some examples:
- Repairs and renovations. Fixing up your home can help preserve its value while adding to the comfort and safety of your family. In some cases, it may prove more expensive not to make a repair than to get it done before conditions worsen.
- Equipment upgrades. Heaters, air conditioners, and large appliances not only need periodic replacement; they become obsolete -- the progress in energy efficiency over the years has been tremendous. Energy savings may not completely pay for these upgrades over time, but they should at least help defray the cost.
- Home additions. Contractors like to sell the notion that adding an extra bedroom or family room will increase the value of your home. The truth is, you may not recover all of what you put into these additions when you sell, but if you acquire some enhanced home value plus more enjoyment of your home, the investment can be well worth it.
- Education. American students are leaving college overburdened by student loans these days. If you crunch the numbers and find borrowing against equity is cheaper than other forms of educational financing, it might make sense to somewhat ease your children's burden in this way. Just be sure the degree being pursued will have long-term value, meaning it should be in a field with a viable job market and come from a credible institution.
- Debt consolidation. If you have run up some unwieldy credit card balances, paying them off with a home equity loan can reduce your interest expense and simplify the management of these debts. Here's the key, though: make sure you have reined in the spending habits that caused your debts to build up. Otherwise, you will just find yourself in the same spot later on, only without the equity in your home to fall back on.
In any case, you should not undertake these expenses unless the resulting payments fit comfortably into your budget, and you feel reasonably secure about your sources of income.
Using Home Equity Safely
In truth, you can use a home equity loan for anything you like, including a shopping spree or a vacation. However, the safest uses of equity are those that have lasting value. Taking out a long-term loan to support short-term spending leads to unsustainable financial habits that can put your property at risk. Always remember that equity in your home has long-term value; if you are going to trade it for something else by borrowing against it, make sure you buy something that also has long-term value.