Our country is obsessed with tapping into home equity for “stuff”. Stuff is vacations, cars, and paying off credit cards. What follows is a dis-jointed collection of thoughts regarding the tapping of home equity.
First, your home is usually a bad investment. Yes it appreciates in value but if you keep track of all the money you pour into it over the years with furnaces, carpets, furniture and remodeling, you probably would be lucky to get your money back. Yes, some people in hot markets like California, Arizonia, Florida and New Jersey have enjoyed rapid appreciation of property but that is the exception. Midwest values don’t move like that.
Second, the home is usually an emotional investment. It is where your family spends its time and everyone is looking for something. Recreation rooms, computer rooms, individual bedrooms for all the kids and other things. Yes you have money invested but it is necessary to create your lifestyle.
When interest rates go low like they have in the last few years, people are tempted to refinance home loans. This is good because you get to pay off your home loan with less dollars. Your cash flow improves month to month and if inflation sets in, you pay back your loan with “cheaper dollars”. On top of that you get to deduct you mortgage interest on your income tax. The genius of refinancing at the lower rate is to lock in the lower rate for the life of the loan. You don’t want to get caught with a loan that rises as interest rates rise. By the way, interest rates are rising.
If you extract money from the equity in your home, it is gone. I have found that it is very nice when it comes time to move to a different house, a build up in equity over years of mortgage payments makes it easy to move up to a better house because you have more equity to put into the new mortgage.
There is a diffference between assessed value, appraised value and market value.
The assessed value is what the city you live in uses to calculate your property tax bill. It is generally close to what houses in your area are selling for in your area.
The appraised value is what a professional (I use that term lightly) estimates your house is worth. Sometimes appraisals are slanted to the high side in an effort to create artificial value so that a “loan or mortgage company” can extend you a loan at high rates. Some people get appraisals to determine what their home might sell for. Real Estate companies have a tendancy to appraise your house high to encourage you to sell.
Then there is market value. That is the value your house will sell for. It is the real value. Once the deal is done, that is how much money you actually get for your house. It is the most important value. It is the only value!
The worst case scenerio is that your house is assessed to high so you have unrealistic property taxes, your house is appraised to high so that you take out loans using the additional equity, and the market value is really quite low so that if you sold, you might end up with “0” equity (or even negative equity).
Having said all of that, tapping home equity is a personal decision. It has to be factored into a family’s total financial situation. If someone is drowning in 23% credit card debt, tight monthly expenses and an unexpected medical costs, home equity is one of the potential sources of cash.
I guess Grasshoppers my final opinion would be to avoid “tapping home equity if you can”. It is not the best financial decision but most of us do not have the discipline to manage the “tapped equity” well. Only you can decide!
Love,
Dad