Leave the equity in your home.
Should you take the equity out of your home?
This one has a simple answer: no.
I received a piece of mail last week from a bank offering me the opportunity to refinance my home. The bank’s pitch was that I could use my home’s equity to pay down other debt. I’ve seen similar mailers, suggesting a refinance to use the equity for things I “want”. There are numerous tv ads showing people looking in their walls for the “cash in their home.”
Are these offers scams? What’s the problem with them?
The commonly cited reason to buy a home, from a financial perspective, is to build equity. Now of course, from a non-financial perspective, aside from having a place to live, people buy homes for emotional reasons, too. Owning a home might make you feel comfortable, at peace, and safe. It’s a place you can make your own. For financial reasons, buying a home makes sense because it is a way to build equity in something for which you would otherwise be spending money (i.e. rent). Additionally, homes typically increase in value over the years, and in the past decade, low interest rates made homes extremely affordable and an even better “investment”.
The main value in a home is that it becomes an asset, but not in a sense of pulling the equity out of it. Homeownership is an asset in two ways. The first is that when you eventually sell your home, it has ideally increased in value, and you make a profit (this often means that you live in your home for quite a while). The other way that a home can be an advantageous asset is that you can reduce your living expenses once you own it outright – something that is unavailable with renting.
So, when a bank offers you the option to take out equity, they are negating the positive financial reasons why you might own a home. By taking out equity in your home, when you sell it, you have already taken out the profit. When you take out equity, it will take that much longer to pay it off and the bank extends its opportunity to collect interest from you.
These offers are made, not because they help you achieve financial wellness, but because the bank makes money when you borrow more. When you get those mailers, walk them straight to the garbage can. You have the tools to pay down debt and get what you want without the bank profiting from you.
If you’re considering homeownership or interested in these topics, The Atlantic published a piece late last year on the mistake of homeownership, especially as an investment. It’s a quick and thought-provoking read.
If you enjoyed this post, you might also enjoy this one on the difference in renting and buying.
My friend and colleague also recently explored the new 40 year mortgage rates in this post.