Home values have skyrocketed over the last several years leaving many homeowners with tens of thousands if not hundreds of thousands of dollars of newfound money, called equity, in their homes.
When you pull the money out of your house the question arises, “What am I going to do with the money?” You could spend it on a new car or boat which will decline in value over time. You could invest the money in fixing up your house, like doing a kitchen remodel so the house is more enjoyable, fixing up the backyard so outdoor living is now part of your lifestyle, these will further increase the value of your home.
In general terms you do not want to over invest in your house if the neighborhood won’t support the money, you’re spending in value increase. Television and other media outlets are doing aggressive advertising encouraging people to pull the equity out of their homes. Interest rates have recently gone up, and all indicators point to the continuation of that rise. If you plan to do an equity loan, the sooner you do it the better in terms of interest you will have to pay on the money you’re borrowing. It’s OK to use equity for an investment but the investment must yield you a greater rate of return than the interest you’re paying on the borrowed money, or you are upside down right off the bat.
Good advice would be, don’t invest it in things you do not have extensive knowledge of. A good example of that might be cryptocurrency or the stock market. Many indicators also feel the stock market is overheated and the prices may come down. Another potential investment might be to pick up an additional rental property.
The same rule applies to your payments on the property you pick up. It needs to be less than the payments on the money you borrowed unless you’re OK with being upside down on a property.
One thing that people seem to forget is history repeats itself and this robust economy that we’ve had over the past few years probably will change.
Any equity pulled out needs to be well thought out in advance, the worst thing you can do would be to put it in a savings account and get 1% interest on money that you’re paying 5 or 6% interest on.
The foundation of our education is that your money should work for you, so you don’t work for it. Borrowed money is great as long as you have a direct path for investment. Taking that lifelong dream vacation to Fiji may be a bad idea. Making payments on a vacation you took for two weeks over the next 15 years is a bad idea.
In real estate, when you invest a dollar, you need to make a profit on that dollar. Adding onto a house to get extra square footage, taking a two bedroom to a four bedroom, etc. gives you increase value, as long as you’re not over- building the neighborhood.
In short, we’ve enjoyed value increases throughout the United States in terms of homeowner’s equity. If you have a good plan for the money, pulling the equity out would be an excellent idea. If you don’t have a plan leave your equity alone and let it continue to grow.
Big picture takeaway points
Self-reflection questions to think more about the content
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