Don't Go Crazy With Your Home Equity
- Date: 2007-02-28 - Word Count: 451
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There were many benefits to the red-hot real estate market earlier this decade. One is the fact many people are sitting on homes with lots of equity. Tapping such equity should be done very carefully.
Home equity is a beautiful thing. For most homeowners, it is a steady accumulation of wealth. Equity is simply the difference between the value of a property and what you owe on it. Over time, equity tends to grow for two reasons. First, you pay down the amount you owe on the home by making monthly mortgage payments. Second, the home should appreciate in value over time. This natural burning of the candles at both ends effectively turns a home into a wealth building tool. During the recent hot real estate market, homes appreciated at stunning rates. Many homeowners are now sitting on significant amounts of equity. The decision to tap this equity, however, should be taken carefully.
Most people access the equity in their home through two methods. The first is to get a home equity line of credit that can be tapped as money is need. The second is to do a cash out refinance where the original loan is refinance for a larger amount with the difference going into the pocket of the owner. The process of refinancing is fairly simple, but the real question is whether you should do so.
If you are sitting on significant amounts of equity, there is going to be a temptation to tap it for purposes that may not be wise. One of the classic temptations is to buy a new car. A credit line is opened and $30,000 or more is spent on a car. The problem, of course, is the credit line is rarely paid back in a manner that will pay off this debt in three to five years. Instead, it languishes over a longer period of time, long enough that the car is no longer worth anything or being used by the owner. In short, you have thrown away equity at a luxury item that ultimately has little or no value. The same goes for purchases of televisions, clothes and so on.
If you are sitting on a lot of equity in your home, you are best off fighting temptation. If you must access the equity, you should try to restrict using it to things that have value. The ultimate choice is to use the money to improve the home. Such improvements add to the value of the home and can be recaptured when it is sold. Buying a car/clothes/vacation does not and you will ultimately regret spending your money on such things.
Dan Lewis is with Great Western Mortgage - providing California home loans.
Home equity is a beautiful thing. For most homeowners, it is a steady accumulation of wealth. Equity is simply the difference between the value of a property and what you owe on it. Over time, equity tends to grow for two reasons. First, you pay down the amount you owe on the home by making monthly mortgage payments. Second, the home should appreciate in value over time. This natural burning of the candles at both ends effectively turns a home into a wealth building tool. During the recent hot real estate market, homes appreciated at stunning rates. Many homeowners are now sitting on significant amounts of equity. The decision to tap this equity, however, should be taken carefully.
Most people access the equity in their home through two methods. The first is to get a home equity line of credit that can be tapped as money is need. The second is to do a cash out refinance where the original loan is refinance for a larger amount with the difference going into the pocket of the owner. The process of refinancing is fairly simple, but the real question is whether you should do so.
If you are sitting on significant amounts of equity, there is going to be a temptation to tap it for purposes that may not be wise. One of the classic temptations is to buy a new car. A credit line is opened and $30,000 or more is spent on a car. The problem, of course, is the credit line is rarely paid back in a manner that will pay off this debt in three to five years. Instead, it languishes over a longer period of time, long enough that the car is no longer worth anything or being used by the owner. In short, you have thrown away equity at a luxury item that ultimately has little or no value. The same goes for purchases of televisions, clothes and so on.
If you are sitting on a lot of equity in your home, you are best off fighting temptation. If you must access the equity, you should try to restrict using it to things that have value. The ultimate choice is to use the money to improve the home. Such improvements add to the value of the home and can be recaptured when it is sold. Buying a car/clothes/vacation does not and you will ultimately regret spending your money on such things.
Dan Lewis is with Great Western Mortgage - providing California home loans.
Related Tags: loan, mortgage, equity, credit, home, house, improvement, line, spend, appreciation
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