Home Equity is Way Up: Are You Taking Advantage Of It?

With the rapid rate of home value increases across the country, many homeowners have found themselves sitting on a substantial amount of home equity. So called “tappable equity,” the amount a homeowner can access while still retaining at least 20% equity, rose by a whopping 32% between late 2020 and 2021, with further increases this year, according to Black Knight, a real estate analytics company.

If you have decided to stay put, rather than try to purchase an upgraded home, there may be a reason to use some of that equity to improve how your home supports your desired lifestyle.

Upgrade in place? With limited inventory and bidding wars, sometimes the grass isn’t greener on the other side of the fence. Expanding, or upgrading the features of your current home may be just the ticket.

Work at home? All office workers cherish the chance to work from home part of the time, but a clear separation between family activities and work time makes working from home less stressful and more productive. Adding dedicated office space or reconfiguring rooms to create separation between workspaces and family spaces could be a smart move.

Aging in place? You can make modifications to improve mobility and accessibility, so you are able to stay in your home into your later years. In effect, investing now in upgrades extends the time the home can support your retirement lifestyle! This can also the time when expensive long-term care must begin.

Space for parents? Many properties are zoned to allow an “accessory dwelling unit” (ADU) to be built. Also known as “mother-in-law units,” these separate studio or one-bedroom units allow you to house aging parents, other family members, and even renters. These can add significant long-term value. Many municipalities are rezoning properties to allow for these, in order to address the housing inventory crunch.

So, how best to tap your home equity to upgrade your home? Fortunately, you have a number of options. We can help you work the numbers to decide which is best for your situation.

• The cash-out refinance often makes the most sense, especially for larger projects, even at rates over 5%. Advantages? A fixed rate, and you just have one mortgage.

• A home equity loan, which borrows a fixed amount at a fixed interest rate is often good for medium-sized projects. It’s a second lien, which sits on top of your existing mortgage.

• A home equity line of credit, also a second lien, lets you spend money on your project on-demand, up to its maximum line limit. It remains open for future expenses once you pay the balance down. But it comes with a variable interest rate. For that reason, we don't usually recommend these for larger projects that will take time to pay off.

So “we need to do the math” to see which of these options would work best over time. With all the tools we have available, we can craft an excellent solution that will allow you to tap into that equity while minimizing the total interest you pay over time.


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