Home equity - Is it time to cash out?

As home equity increases, more homeowners are sitting on a fortune

The last five years have seen a tremendous increase in real estate prices, as investors have spurned risky tech stocks in favor of property. In some parts of the country, and the Bay Area in particular, home prices have tripled since 2000. The median price of a home in the Los Angeles area is now approaching $500,000 and the median price of a home in the Bay Area is nearly $600,000. The economy continues to grow, more people are buying homes, and the prices are continuing to rise all over the country.

This has led to a surfeit of wealth in home equity. Many homeowners, some of whom have owned their homes for less than three years, are now finding themselves with hundreds of thousands of dollars in equity in their homes. This comes as quite a shock to members of a society that traditionally doesn’t save much money, and many of these homeowners aren’t quite sure what to do with their sudden wealth of equity. It should be noted that these values are strictly theoretical, as equity only translates to cash if you actually sell your home and take the money. In the current market, with prices shooting through the roof, many homeowners are doing just that.

Home equity loans are enjoying increased popularity these days, and many Americans with large amounts of equity are taking out such loans and using the money for such things as debt consolidation, home improvement, dream vacations, recreational vehicles and additional real estate. Others are taking advantage of this rare opportunity and are simply cashing out and moving to less expensive cities. Prices are skyrocketing on both coasts, but in between, the increases in home values are more modest. A home purchased three years ago in Los Angeles for $250,000 may be worth $600,000 today, but that same home would sell for considerably less in Fort Worth, Texas. Moving from California to Texas could allow the homeowner to buy a new home, pay cash, and keep several hundred thousand dollars as profit.

Most Americans see their home equity as their largest asset. In times of rising real estate prices, it makes sound economic sense to examine one’s real estate value and see if it wouldn’t make financial sense to move elsewhere and pocket the money. Granted, this is not an easy decision and picking up and moving doesn’t suit everyone. It may mean finding a new employer, finding new friends and a new neighborhood and uprooting children from their schools. Anyone considering such a move should take the time to carefully weigh out all of the options before taking action. On the other side of the coin is a rare opportunity to withdraw several hundred thousand dollars in cash from your home. This could provide a terrific opportunity to fund a retirement account or a better overall lifestyle.

Anyone considering selling their home and cashing out their equity should be aware that there are tax considerations when selling a home at a profit. Anyone who does so would be wise to first consult with a tax preparer or financial advisor.