While homeownership has long been touted as the right financial decision for American families, the effects of the Great Recession may be outweighing the benefit of buying a home, writes U.S. News and World Report column.
Home equity can be a blessing, the column states, but home equity may be overrated in light of the recent economic turmoil.
U.S. News writes:
If you’ve ever thought about buying a home, you’ve heard the song and dance on home equity plenty of times. You know that home equity can help your credit score. It can be leveraged for borrowing. It is forced savings and will boost your personal net worth. Most importantly, you know that in getting a mortgage, you pay yourself back with every payment.
While home ownership is a good financial decision for many families, the benefits of home equity are frequently overrated by homeownership proponents.
…There are two ways you can get value for your home equity. You can sell your home or you can leverage your equity for a loan. In both cases, the amount of money you get converting equity to cash is much less than the number you calculate on a piece of paper.
Selling your home comes with a number of selling costs. Usually you pay 6 percent commission to the realtors you use, plus legal fees and potential selling concessions. Unless you are a realtor and real estate lawyer, you probably can’t get 100 percent of the equity in your home by selling.
Borrowing against your equity often comes with bank fees and will certainly carry interest costs. If you were to utilize a reverse mortgage, banks usually only let you borrow up to 80 percent of your equity’s value.
Home equity looks nice when you subtract the selling price of your home from the principal you owe on your mortgage, but the real value of the equity is far less.
Written by Elizabeth Ecker