St. Louis Post-Dispatch: 3 Reasons to Tap Into Home Equity

From home repairs to credit card debt to retirement planning, the St. Louis Post-Dispatch suggests homeowners consider instances when it makes sense to tap into their home equity through reverse mortgages or lines of credit. 

“Improving your home and increasing its value are often good reasons to use your home equity,” AJ Smith writes. “If you bought a home that needs an addition, garage, finished basement, cosmetic improvement or kitchen or bathroom updates, tapping into your home equity can provide the necessary funds.”

Additionally, as Americans prioritize paying their mortgages ahead of their credit card bills, personal debt can soar. Using home equity to pay down that debt can potentially help, but doing so comes with its own set of risks, Smith notes. 

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Finally, using a reverse mortgage to help fill gaps in retirement income can be helpful, especially as retirees in 49 out of 50 states have insufficient retirement income.

Previously, a survey of 1,000 people found that 85% of respondents said having a guaranteed monthly income stream was their top priority for retirement planning. A reverse mortgage, the survey found, could help alleviate that concern. 

To read the full St. Louis Post-Dispatch article, click here

Written by Emily Study

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  • AJ needs some education about what home equity is. Here is a sample of his jibberish: “Improving your home and increasing its value are often good reasons to use your home equity,” AJ Smith writes. “If you bought a home that needs an addition, garage, finished basement, cosmetic improvement or kitchen or bathroom updates, tapping into your home equity can provide the necessary funds.”

    I am just making a silly assumption but if one borrows against the home to improve it, then one is not only reducing equity by the increased balance due from taking loan proceeds but at the same time one is increasing home equity by the additional value those additions bring to the home. By the time the additions are completed, it will be hard to tell what portion of any increase to the value of the home comes from any general increase in the value of home due to market conditions and what part is due to the actual value added because of the improvements which in part will also be dictated by market conditions.

    To illustrate, let us say that home equity is $275,000 (or $500,000 in value minus total liens of $225,000). The homeowner takes out a home improvement loan of $50,000 and adds a bathroom and modernizes the kitchen. Let us say that after the improvements, the value of the home rises to $575,000 and the balance due on all liens now stands at $270,000 so that home equity is now $305,000, an increase of $30,000. If in the time that the improvements were completed home values in the area rose 5%, then a case can be made that the home as is rose $25,000, the liens were paid down by say $4,000, and the home equity due to the improvements rose a net of $1,000 (i.e., value from the improvements rose $51,000 and was also reduced by the $50,000 in increased liens). So how in this case was home equity used to improve the home??

    While AJ is a little less off the wall with his illustration of using home equity to pay down credit card debt, as to the value of the net estate of the borrower, nothing changes except that the borrower more than likely will incur less debt. Say the net estate is $400,000, liens against the house total $200,000 and credit card debt is $25,000. Now the borrower increases the debt on the house to $225,000 to pay off the $25,000 in credit card debt. At the end of the day, home equity drops $25,000 and credit card debt decreases $25,000 resulting in the same net estate of $400,000 after this transaction.

    Now if one uses a mortgage to live off of in retirement, then to the extent loan proceeds are consumed, mortgage debt increases, but we have no idea if home equity decreased or not. What if after four months the value of the home rose faster than the mortgage increased, did home equity decrease? In absolute terms — it all depends on what happened to the value of the home in that time period. Yet if the mortgage had not increased, the equity in the home might be higher; however, if the borrower was underwater anyway and the mortgage was nonrecourse, then one can argue that the increased debt did nothing to home equity. As we all know this can happen with a HECM that has an available line of credit.

    So all in all, the author showed he does not understand what home equity truly is and how home equity really relates to homeowners.

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