When to Use Your Home Equity to Your Advantage
July 23, 2018 | Posted by: Ron Chan
One of the reasons people hold off on making a downpayment to buy a home is that they want to have liquid funds to allocate towards some other opportunity or quality of life improvement. However, this should not deter you from entering into a mortgage, because the equity you have (and build upon) in your home can be put towards those very same opportunities (investments, etc.) and lifestyle upgrades. That being said, in tapping into your real estate worth, you want to make sure you’re not putting yourself at too great a risk. Today, we take a look at the key signs that now may be a good time to tap into the equity of your home.
4 Signs That You Should Consider Putting Your Home Equity Towards a Worthwhile Endeavor
1. You’re Using it to Make a Home Improvement
This one makes a lot of sense for the simple fact that you’re using equity in your home to improve the home and increase the value (and thus resale value) of the property. You get to enjoy the quality of home life upgrades, while making a smart investment in an investment you have already made. On the surface, it’s a win-win. However, you must be certain that the upgrade is one that others also see as an upgrade.
For instance, while you and your family may think it’s awesome to install a firehall pole as a means to get from the top floor to the basement, others may (most likely) not. While this is an extreme example, you will want to receive a professional assessment as to whether or not the intended upgrade/s will indeed increase the value of the property. While a swimming pool installation may attract some future buyers (when you decide to sell) many Winnipeg residents will be turned off by the upkeep required, especially for something that can only be used for a few months out of the year. Instead, using equity for upgrades such as a kitchen renovation are much more practical and can certainly serve to increase the market value of the house.
2. You’re Paying Off Debt with Greater Rates of Interest
This is another common use of home equity. It makes sense when the interest you’re paying on other forms of debt (credit cards, etc.) is greater than that of the interest payments on your mortgage. The caveat however, surrounds whether or not you intend upon being responsible with your credit from here on in. If you can say for certain that you (or a spouse/dependent) will not rack up further debt, then go for it. Otherwise, using equity to pay off debt that will return can get you in hot water you may not be able to escape from. Smart financial management is key here, and you must also consider the fact that there will be closing costs on a home equity loan. Factor everything into the equation and consult with a professional before taking the next step.
3. You Have Moderate to Strong Risk Tolerance and Lucrative Investment Opportunities
This one isn’t for those with low risk tolerance. But for those that understand that there can be no great reward without some reasonable risk, there are some lucrative investment opportunities out there that could pay off big dividends IF you have the available funds to buy into them, funds that can be pulled from the equity in your home. This investment portfolio can (and perhaps should) include real estate which in Winnipeg (where the market is fairly consistent) is certainly less volatile than the stock market or your best friend’s idea for the next biggest thing. In fact, using current home equity to invest in a second home can be a great piggybacking strategy that can help you build up your wealth relatively quickly. But again, this should be done with some professional guidance.
4. You’re Ready to Invest in YOU
This one also made the rounds in the recent article titled Reasons Not to Pay Off Your Mortgage Early. If you are looking at starting (or building upon) your own business, one with a sound business plan with a corresponding financial plan, you may indeed consider a home equity loan that may offer a better rate than a traditional small business loan.
As Winnipeg’s full service mortgage broker, I can help you apply your home equity to consolidate debt, make a home improvement, and more. More importantly, I can help guide you towards the right decision, even if we discover that the decision is to maintain your course or consider other uses of your current equity. The only way to find out how you can make the equity in your Winnipeg home do more for you, is to contact me for a friendly, noncommittal, yet highly informative conversation.