While home equity should not be the first resource someone goes to when disaster strikes, it can nonetheless be a powerful tool for someone who needs access to cash when options are limited. This is also likely a more prevalent resource for a homeowner in the U.S. to call on considering the levels of home price appreciation observed in 2021, but tapping that resource is not a decision that should be made lightly.
This is according to a column published this week by NerdWallet. Keeping the source of the money in mind is also critical, since seeing accelerated levels of home price appreciation may give some people license to more freely aim to tap the new equity they have, according to AnnaMarie Mock, a certified financial planner with Highland Financial Advisors in Wayne, N.J.
“It’s not free money,” she tells NerdWallet.
The column lists three primary ways that someone can access their home’s equity: a home equity loan; a home equity line of credit (HELOC); or a cash-out refinance. The article only makes a brief mention of reverse mortgages, but does not go into detail about them due to their age restriction since Home Equity Conversion Mortgages (HECMs) are only available to people age 62 and older.
However, while these products all have their own pros and cons, understanding the risk that any option introduces into a family or individual’s financial well-being is essential before signing on the proverbial dotted line, the column says.
“Your home serves as collateral when you borrow against home equity, just as it does for your mortgage. That means you risk losing the home if you can’t repay,” the column reads. “A worst-case scenario: You borrow against all the home equity you can. The housing market craters — think of the Great Recession in 2008 — and home prices plummet. A life change necessitates a move, and you have to sell the house when you owe more than it’s worth. Or you get laid off and have already leveraged everything to the hilt.”
Some people may be prone to borrow against their home for assets with depreciating value such as cars. Unsecured debt is also something that home equity may not be the right solution for, according to certain financial experts.
Read the column at NerdWallet.