Home equity is just a number unless you use it

Home equity can be used in a variety of ways

With real estate prices hitting record levels during the past five years, more and more Americans are finding themselves to be “equity rich.” The equity is the difference between the value of the home and the amount that the owner still owes on it. With explosive growth in some markets, such as California, many owners have suddenly found themselves with hundreds of thousands of dollars worth of equity in their property.

Of course, like the value of stock, the value of equity only exists on paper. In order to turn that paper value into cash, you need to sell the property or take advantage of it in some other way. Otherwise, that increase in value is just a number, and a relatively meaningless one, at that.

But homeowners have been aggressive about taking advantage of that additional equity in their homes. Here are a few ways that you can turn that number into real, useful cash:

• Move to a cheaper house - You can sell your existing home, move to a less expensive home and keep the difference in price. In most markets, moving to a cheaper home necessarily means moving to a smaller home. For retirees or people who are near retirement, this may be an ideal thing to do. Smaller homes require less upkeep and have lower taxes due to the lower value. Your equity isn’t taxable, provided that it is less than 250,000 and you have had the property more than two years.
• Move to a cheaper neighborhood - If you are willing to move quite some distance, you may be able to get a house of the same or even larger size while still extracting cash from your existing house. If you live in Southern California, moving to Des Moines will probably let you keep a large house and equity. This idea is not for everyone, but if you are set on cashing out, it’s a great way to do it.
• A Reverse Mortgage - Ideal for retirees, as you must be 62 or older to qualify. In this case, you are lent money based on the value of your house and you can take it in the form of a lump sum or monthly payments. The lender is repaid when you sell the house or die. Bonus - If your house is worth less than the loan amount at the time the house is sold, you may not be compelled to repay more than the value of the house.
• Home equity loan - Not really “cashing out”, as you must repay this. Still, in neighborhoods where housing prices are still appreciating, you can borrow money to upgrade, add a home theater or a swimming pool, and deduct the interest from your income taxes. You can also take out a home equity line of credit, which allows you to repeatedly borrow and repay according to your needs.

In today’s market, there are a number of ways to take advantage of the rapidly increasing housing values. All it takes is a bit of creativity. The house is yours, and you may use its value as you wish.