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SHOULD YOU ACCESS HOME EQUITY?

  • Writer: Treavor Dodsworth CFP®, CPA, CKA®
    Treavor Dodsworth CFP®, CPA, CKA®
  • Jan 17
  • 2 min read

Over the last several years many homes have seen a significant jump in value and subsequently many home owners have positive home equity. Lenders have jumped on this and started marketing specifically trying to have people access their equity. So what does access home equity mean and should you entertain the idea?

Home Equity

Home equity is simply the value of your home less your outstanding mortgage. Therefore if you have a $350K home and a $250K mortgage, you have $100K equity.


There are three primary ways lenders try and get you to access your home equity:

  1. Cash out refinance. This is a complete redo of your underlying mortgage. Effectively you get a new mortgage and cash out. Since interest rates have risen, most borrowers current mortgage has a substantially lower rate than what you would get refinancing. I would exercise extreme caution in pursuing this as you likely do not want to lose the low rate you currently have.

  2. Home equity loan. This is a second mortgage of sorts on your current home that could have a fixed rate and term. There are fees and interest associated with taking out this type of loan. One mortgage is great right? Here have another.

  3. Home equity line of credit or HELOC. This is typically an option to tap a line of credit against your home. Generally with variable rate though some have fixed rates. If variable rates don't concern you, they should.


Just because you have home equity doesn't mean you should access it. First remember how net assets are calculated. You may feel better if you take some cash out of your home but you haven't helped your net assets any. You may have even hurt your net assets if you take that cash and spend it inappropriately.


Even if you are taking the proceeds and paying off debt I would exercise caution. If you have not fixed the underlying problem of what ended you up in debt in the first place, taking out home equity likely won't help you in the long run. The magical fix to your debt problem is not taking out more debt.


Tapping home equity is advertised as a quick fix or a way to circumvent the normal saving process to finally reach some financial goal. While I wouldn't say it doesn't ever make sense, it is far from a slam dunk and I would exercise caution.


For a more expansive review of this topic check out FaithFi - Turning Your Home Equity Into Ready Cash

 
 

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