A lack of knowledge about mortgages and home buying in general may be causing many home buyers and owners to overlook the financial benefits of holding a mortgage.
Some consumers believe its easier to program TiVo, do their taxes and understand the opposite sex than it is to understand the home buying process, according to a Harris Interactive poll commissioned by Countrywide Home Loans, Inc.
That means many are also in the dark about using their home as a financial management tool, Countrywide says.
The lender found 91 percent of home owners deem equity in their primary home is an important financial aspect, but fewer plan to use it.
Home owners often believe they are tied to their original loan and don't bank on equity or the ability to change loans or otherwise manage the asset as they do other investments.
Only 60 percent of those with equity would tap it at all, the survey found, which flies in the face of reports that home owners squander equity money on frivolous purchases. The survey found most of those who would tap their equity, 70 percent, would use the money only for home improvements, a worthwhile use if the improvement provides a good return for the money, but not the only use.
An equity loan, by nature is an equity depleting loan, but when used for capital improvements that provide a greater return than the cost of the money, they can be a wise use of home equity.
Other approaches to managing equity as an asset include:
- Obtaining a new loan to stop the upward march of interest rates on a adjustable rate mortgage (ARM). Even a slightly higher fixed rate will be more manageable compared to an ARM allowed to adjust to it's maximum amount. If your new loan is cheaper, continue paying the old amount to generate more equity faster.
- Refinancing to use some of the equity to finance capital improvements, start a new business, pay for education or other low-risk investment likely to yield a return.
- Tapping equity before it's needed, say before a job loss, at which time a lender will be less likely to approve the loan. The funds won't cost consumers until they actually use them, but they will be available in an emergency. Likewise tapping equity for the one time use of consolidating debt -- provided the consolidated accounts are closed and not reopened -- can be a cheaper way to pay down debt.
- Using the equity from a first home to purchase a second home, provided the second home is affordable or is an investment property with a positive cash flow from rent or other use income.
- Using the home as a retirement fund in the form of a reverse mortgage. The special mortgages require initial counseling (mandated in some states) and special attention to the details, but they allow home owners at least 62 years of age to tap their equity as tax-free income. The loans aren't for everyone 62 and older but for some they are worth considering, again, only with great scrutiny.
No matter how home owners approach equity use, the fundamentals apply, says Countrywide.
- Learn and understand the details of financing -- mortgages -- likely to be secured by your most valuable single asset. Knowledge of financial options and the inner workings is crucial to getting the most bank for your equity buck.
- Keep tabs on your current income -- wherein lies your ability to pay back the loan -- as well as evaluated future earning potential.
- Be especially attentive of ebbs and flows in commission-based, self-employment, second job income and supplemental wages if those incomes are used to pay the mortgage.
- Keep tabs on equity growth or loss. Loan terms, payments, economy-based appreciation or deprecation are factors contributing to your level of equity.
