 | Property values have recovered nicely over the past several years. During these times of higher values, it’s tempting for homeowners to spend more money frivolously because they now have a higher net worth......... |
It’s a common occurrence that when values go up, homeowners start feeling better about their situation. They do home upgrades and go on more vacations. They buy cars and boats they never thought they could afford before their house appreciated.
The problem arises when there is no money outside of home equity to pay for these things. Because home equity is not cash in the bank like some think.
You have two choices to access home equity:
- Refinance to “take cash out”. The problem with this is the “cash” you take out now requires you to pay interest on your equity. So without selling the home, you pay the bank to borrower your own money.
- Sell the home. The problem with this is now you have to find a new place to live, which means you are likely buying another home that also appreciated.
So unless your real estate is an investment property, or you plan on selling that California home to use your $200,000 equity to buy a home in cheaper parts of the country, appreciation can be deceiving.
By no means does this article say owning a home isn’t a wonderful thing. Nor does it say home equity is not valuable. However, it’s extremely important to exercise caution in how you think about and use your home equity.
If you have any questions, please give us a call. We’re here to help!