Your Home is Your Investment

For many, your home — and the mortgage that backs it — is not only your most valuable asset but also your most valuable investment. Put it to work to stimulate your own financial well being. You can wisely bank on your equity, you aren’t strapped to your original mortgage and you can otherwise manage the asset for growth as you should with any financial asset.

Home equity primer

Initially, a home purchase typically comes with home equity — the difference between your mortgage balance and the value of your home. When you buy a home with a down payment of, say 20 percent, you have a 20 percent equity stake in your home. Over time, mortgage payments made against the principal and appreciation can give you a larger equity stake. Likewise, depreciation can reduce your stake. Lenders allow you to borrow money against some — but rarely all — of your home equity, provided you qualify with good credit and adequate income. Just keep in mind, when you use your equity, you lose it. A home equity loan, by its very nature, is an equity-depleting loan. You don’t have an unlimited amount of equity to bank on, so use it wisely. With two mortgages, should interest rates rise and push up both monthly payments, you could quickly reach an affordability point of no return.

Wise home equity uses

The best uses of home equity are for capital improvements, investments that provide and equal or better return on your money than the cost of the loan. That can include certain home improvements, education for the kids or financing a new business. Another wise equity use can be to purchase a second home, provided the second home is affordable or is an investment property with a positive cash flow from rent or other use income. You can also use equity to consolidate more expensive debt, say credit cards, but only if it’s a one-time consolidation effort, you close the accounts and don’t reopen them or others. Sock away the money you save on a consolidation or money earned on investments to help eliminate the need for credit and buy those big ticket items. Avoid using your home equity to buy expensive cars, boats, RVs, vacations, home theaters and other items that don’t give you a return on your money.

When to tap equity

Plan for your equity based investments based on real need and carefully considered financial goals, costs and returns.
There are, however, times when you should consider tapping your equity before you need it, say, before an impending job loss — at which time a lender will be less likely to approve a home equity loan. The best back up home equity loan is a home equity line of credit (HELOC). Like a credit card, if you don’t use it, there are no payments, but it’s there if you need it. HELOC’s are almost always cheaper than a credit card, but it is a form of revolving credit, often with an adjustable interest rate. A home equity loan for a fixed amount with a slightly higher fixed rate may be a good deal for set costs, financial endeavors, investments and the like. Because it is an installment loan with fixed payments, however, the loan forces you to begin making payments right away, even if you don’t use the money right away.

Wise mortgage management

In addition to home equity investments consider these mortgage management strategies. Instead of an equity loan, refinance to take equity cash out to finance wise, low-risk investments with a decent return. Refinance your mortgage for a lower rate or to stop the upward march of interest rate adjustments on a adjustable rate mortgage (ARM). Even a slightly higher fixed rate will be more manageable compared to an ARM allowed to adjust to its maximum amount. If your new loan is cheaper, continue paying the old amount to generate equity faster.

Use the home as a retirement fund in the form of a reverse mortgage. The special mortgages require initial counseling and special attention to the details, but they allow home owners at least 62 years of age to tap their equity as tax-free income. The loans aren’t for everyone 62 and older but for some they are worth considering, again, only with great scrutiny and perhaps the help of a knowledgeable expert.