As the housing market begins to cool you may be wondering what is best way to access your home … [+]
With mortgage rates skyrocketing to highs we haven’t seen in well over a decade, accessing your home equity may be more costly than just a few months ago. If you are reading this post, I’m guessing you have owned a home and hopefully have substantial home equity. As a financial planner, I’d caution you only to use your home as a piggy bank if there are no other viable options to meet your need for cash.
Keep reading as we highlight the most common ways to access your home’s accumulated value.
Home Equity Line Of Credit (aka HELOC)
A home equity line of credit can act as a quasi-emergency fund. I like to see people use a HELOC for that rare emergency or a temporary cash flow crunch. While HELOCs can be very flexible, they can be costly if used improperly.
The best time to establish a HELOC is when you don’t need the money. You establish the ability to borrow a certain amount against your home equity. Setting up a HELOC can cost anywhere from nothing to a few thousand dollars. (It will likely depend on your lender, creditworthiness and the size of the line of credit being requested.)
The good thing about a HELOC is you can draw money as needed. This helps avoid paying interest on the money you not need right now, but could need at a later date. The drawback to a HELOC is the interest rate can fluctuate, so your cost of paying the interest on the loan may be harder to plan around. So, this is not always the best option for longer-term borrowing.
A Home Equity Loan
A home equity loan may also be called a second mortgage (or, in some cases, a third or fourth mortgage). I expect these to grow in popularity if interest rates stay at their current levels or higher. If you have locked in a low rate on your primary mortgage, you won’t want to refinance to current rates to access home equity.
A home equity loan is a good option for improvements or more expensive home repairs. I’m thinking of things like remodeling, a new roof, or a new HVAC system.
So, what’s the difference between a HELOC and a home equity loan? A HELOC offers you a line of credit. With a home equity loan, you will request a specific loan amount. For both, you will be obligated to make monthly payments to pay the loan back based on the loan terms. These terms will vary, so discuss with your fiduciary financial planner what options will be best to keep you on track for your financial goals.
Rent Out Your Home
If you own your home and don’t need/want to live there at the moment, consider renting it to someone. This is also an option when you are unable to sell your home. It’s also a way to turn your equity into an income stream. Hopefully, in this scenario, your rent will more than cover the costs of your house (mortgage, taxes, insurance, etc.).
Related: Is Now The Time To Rent Or Sell Your Home?
Turn Your Home Into A Vacation Rental
At this point, I think we all are aware of sites like Airbnb, Vrbo, and misterb&b. Depending on your situation, you could rent out your home while you are on vacation or turn it into a full-time rental. Operating a short-term rental property can be quite lucrative but also highly time-consuming. So, do your homework before making any decisions.
Related: Go Beyond The Mortgage Deduction With An SBLOC
Reverse Mortgage
Reverse mortgages are complex and often quite costly. While you can potentially get a reverse as young as age 62, the cash-out benefits are less appealing the younger you are. On the flip side, if you are 85 without an heir, living in a paid-off home, you may benefit from living in your home and enjoying access to the home equity.
For more detailed pros and cons of a reverse mortgage, read this post from Forbes.
You Can Always Sell Your Home
You can always try to sell your home to access your equity. This can be a great option for those looking to move in retirement or, perhaps, taking a job in another city and needing to sell.
Don’t ignore taxes when selling a home. They can really add up.
Extra Credit: Consider House Hacking
Blanche Deveraux of The Golden Girls may be the most famous house hacker. She rented out rooms to Dorothy, Rose, and Sophia to help get access to her home equity and boost her retirement income.
For the rest of us, house hacking may mean roommates. It could also be adding an accessory dwelling unit to your home or renting out part of your garage for someone to use as storage.
