A home is a wellspring of untapped potential, particularly for homeowners with equity. The longer you stay invested in your home and make regular monthly mortgage payments, the better. For most everyone, a home is a sanctuary. A haven from the chaos of the world. But real estate is so much more than that; it’s also collateral that serves your needs when cash flow is limited.
As one of your portfolio’s most valuable assets, a home is a bulwark against economic uncertainty. Over time, as the mortgage is paid down and the principal balance diminishes, your equity increases. Loosely defined as the difference between a property’s market value and its outstanding balance, equity is financial capital. It’s the proverbial fistful of dollars homeowners can access when needed.
Viewed in perspective, equity is potential borrowing power. The more you have, the greater your borrowing potential. Whether you utilize a cash out refinance option as a veteran, a HELOC, a second mortgage, or some sort of line of credit, the net effect is similar. Equity provides opportunities for debt consolidation, payment for alterations, remodeling initiatives, and necessary repairs.
In fact, equity access can be used for a range of purposes, not only in personal or rental real estate. Homeowners have a unique advantage over renters. With homeownership, there is always skin in the game. For a renter, it’s merely a duty to make a monthly payment for a predefined lease term. As we know from the pandemic run on property prices, significant appreciation took place during 2020 through 2023. Now, the market is undergoing a consolidation phase at a higher level.
Do Interest Rates Impact How You Unlock the Value of Your Home?
Indeed, they do. Mortgage interest rates are either fixed or variable. When a fixed rate is lower than the prevailing interest rate, then homeowners save on the repayments. The converse also holds true. Anyone who purchased a property during 2020 – 2026 invariably has a higher interest rate than many homeowners before that. Fixed rates in the region of 5% – 7% may fare poorly when compared to the lower interest rates in the 1% – 4% range, depending on myriad factors.
At a bare minimum, the monthly cost savings on lower interest rates are substantial, potentially totaling a fortune over a 30-year mortgage. For this reason, it pays to negotiate the lowest possible interest-related repayment rate on refinancing. Variable rates are often lower, more flexible for short-term borrowing, and incur interest only on the borrowed portion of the funds. Fixed rates are far more predictable, stable, and easy to plan with.
Interest rate policy remains closely tied to broader economic conditions. The Federal Reserve evaluates inflation, employment, and growth indicators as it works toward price stability and its long-term inflation target, shaping the borrowing environment homeowners must navigate. In short, interest rates will affect the cost of borrowed capital. But there are many viable options to affordably tap into your home’s equity.
Just Because You Can Should You Unlock Home Equity?
Access to credit is better than no access to credit. And it becomes important when exigencies occur. Whenever an urgent upgrade, renovation, or repair is needed, homeowners will appreciate home equity. Given that the average American has about $500 in their bank account for a rainy day, it is easy to see how big repairs would never take place without access to credit facilities.
This begs the question: When does tapping into home equity make sense? The answer is nuanced, and it depends on timing and purpose. The focus is on short-term liquidity over long-term wealth erosion. If the purpose of the loan is productive (efficiency upgrades, repairs, or consolidation), then these may present as situations where the use of equity makes sense. Of course, there are instances when sitting tight is better than borrowing.
There are clear use cases for using equity, notably:
- Consolidating high-interest debt
- Reinvesting in upgrading the property
- Stabilizing monthly cash flows
The point must be made that accessing equity should not be viewed as a blank check. Equity is not free money. It comes at a cost, and homeowners are using collateral to fund the credit. Used thoughtfully, home equity can solve meaningful problems without creating new ones, provided homeowners understand the costs and trade-offs.
