Home Equity - Your Most Valuable Tool

By Howard J. Willis *

The whole idea of home equity has often been confusing to many of us, with suggestions to “take a look at your equity” as “crossing the line” in terms of what is rational or foolish.  We Americans have grown up in a culture that makes touching the appreciated value in our home as indeed “untouchable”.  Despite this, many successful real estate investors have accumulated higher levels of wealth by doing just that, “touching” their equity and using the value between what is owed and what the property is worth to acquire other properties. 

Your Home Equity Has Likely Grown a Lot!

Low interest rates and a depressed stock market have contributed to record rates of increase in home values.  The average home in the Weston market has increased more than (15) % per year over the last two years, so hopefully this writer will challenge you to take a look at your own situation.  Let’s take a look at a few examples which demonstrate how the average homeowner can use the equity in their home. 

Auto & Credit Card Interest Debt – Your Cash Down the Drain!

By taking out a home equity line of credit or loan and paying off your installment credit debt still means you’re paying interest.  The difference is that the Federal Government will potentially reimburse you by claiming the interest you pay as a deduction and reduce your taxes.  Uncle Sam is effectively paying you to borrow on your home. 

Expand or Renovate Your Home

While most homeowners live an average of about (5) years in their primary residence, some choose to update or expand their homes for a variety of reasons.  You may be tired of that outdated kitchen or bath, or you may decide to increase the value of your home now and enjoy it at the same time.  These types of projects can be financed by home equity credit and of course still by tax deductible interest payments.

80-20 Mortgages: Conserving Cash & Avoiding Private Mortgage Insurance

         (PMI)

Here is an intriguing area that this writer first urges the utmost of caution.  Borrowers who turn to 100% financing are taking increased risk.  But as always, there are rewards to taking risk.  The home buyer takes out two loans – the first for the 80% of the purchase price that the first lender will expect.  The second loan is for the remaining 20% of the price.  The buyer normally would still pay the closing costs.  This approach allows the buyer to buy without a down payment and to avoid going into their savings.  The buyer also potentially saves a lot of monthly cash by avoiding the PMI costs.  The 80-20 loan can be especially helpful to renters who haven’t saved enough yet to buy an 80% mortgage.

PMI?  Lender’s Insurance Against Risk of Foreclosure

When a borrower falls too far behind on loan payments, the lender is protected from foreclosure costs.  The borrower pays this insurance for the lender.  Mortgage insurance is generally needed when the loan amount is for more than 80% of the home’s sale price.

So mortgage brokers and borrowers have developed one way to avoid PMI - by offering a “piggyback loan” – a second mortgage to allow the buyer to make the first bank’s minimum of 80% of the sale price.  Where’s the risk?  If the house loses value – if there is an economic downturn and demand for housing decreases, or other factors – the owner could end up owing more than the house is worth. 

Buying a Vacation / Second Home with Your Primary Home’s Equity

Especially in South Florida, second homes are a big part of our market.  Second home ownership is not just the playground of the rich and famous.  Many people with average incomes can invest in a second home property.  Using the equity in your primary home is a growing trend, helping build wealth by now having a second property begin to increase in value. 

Using Equity: A Challenging but Potentially Highly Rewarding Tool

There are a number of factors and variables that the homeowner must consider.  Basically, you should consult with a Realtor or mortgage broker to help you estimate how much equity you do have in your home.  You know the mortgage balance owed, and your Realtor will be happy to provide a “CMA” – a market analysis of the recent sales that indicate the value of your home.  Borrowing against your equity has two big advantages: it is generally the lowest in cost plus it can be tax deductible. 

*Howard Willis is a realtor affiliated with Esslinger-Wooten-Maxwell Realtors.  He and his wife Allegra are principals in Allegra & Howard Willis Real Estate Group.  Howard has a law degree and specializes in providing real estate sales and services to premium home and condominium owners. Call with your questions and comments to (954)949-0444 or to howard@thewillisgroup.com. Learn more about Allegra and Howard at www.thewillisgroup.com