The red-hot real estate market means homes are rising in value at a meteoric rate. In fact, in some areas of the country, properties have doubled in value over the last two years. Because of this, many homeowners like you may be wondering what, if anything, they can do with this burst of equity. Here, we’ve outlined several financial moves you may want to consider at this time.
Naturally, the financial move that first comes to mind when homes experience an explosion in equity is to sell the home and pocket the profits. For some people, this can be a great idea, but for others, it can spell financial disaster. Here’s what to consider before making this move.
First, it’s important to have a clear picture of your next step after selling your home. Do you plan to buy a new home in the same area as your existing home? If yes, you may want to think twice about selling. If you do choose to go ahead and sell your home, you’ll likely walk away with a tidy sum of money, but you’ll need that money (and maybe more) to purchase your next home, which will also be selling at an exorbitantly high price.
If, however, you’re looking to downsize and find a smaller and cheaper place to live, this can be a great time to sell your existing home. The market is hot, and you’ll likely get lots of generous offers along with a nice profit from the sale which can take you far beyond the purchase of your new, smaller home (be aware that there could be capital gains tax implications if profits aren’t put into a new home; consult a tax professional). The same is true if you plan to move from a particularly popular area, such as the suburbs, to a quieter town that is not in such high demand.
Finally, be sure to get an estimate of the interest rate and payment you’d have on your new mortgage before putting your current home on the market. Rates are rising, and you may end up with a monthly payment that is higher than anticipated. Run the numbers before making a decision so you have a clear idea of what your new mortgage scenario will look like.
2. Have your home appraised to remove mortgage insurance.
If you put down less than 20% of your home’s value at the time of purchase, you likely pay toward private mortgage insurance, or PMI, each month. These payments are generally set into place until the buyer owns 20% of their home. However, if the home’s value jumped, that time will come sooner than expected. Having your home professionally appraised will tell you if you own 20% of the home’s current value, in which case, you no longer need to pay the PMI. The appraisal will cost several hundred dollars, but this cost will easily be offset by the cancellation of the PMI.
3. Reassess your insurance coverage.
If you don’t plan on selling your home, and it has significantly increased in value, you may want to review your insurance coverage. Your insurance policy was likely purchased when your home was worth less than it is now, which means it will not cover the current value of your home. Review your policy and consider increasing your coverage to avoid being left with insufficient coverage in case of catastrophe.
4. Take equity out.
Thousands of homeowners are taking advantage of the increased equity in their homes through one of two means: a Home Equity Line of Credit (HELOC) or a Home Equity Loan. A HELOC is a line of credit that allows the homeowner to take out cash as needed over a “draw period,” after which the funds are returned over a predetermined time. A Home Equity Loan is a lump sum of money a homeowner can borrow and then pay back over the loan’s term. Each of these products uses the home’s available equity as collateral.
Another way to tap into your home’s equity is through a cash-out refinance. This works by taking out a new mortgage, paying off the existing loan and keeping the difference in cash. This is typically recommended when homes are rising in value, like they are in the current market. If you do go this route, it’s important to crunch the numbers carefully before going ahead to be sure you can really afford the payback terms on your new mortgage.
Home values are skyrocketing, and the financial moves above may help you to cash in on your home’s increased equity.