30% of today’s homeowners owe $0 to the bank—here’s what that means for them and for you

Home equity is a funny thing. A lot of homeowners have it and they have it in spades.

Yet few homeowners are prepared to do anything with all that equity they’ve earned. 

For this reason, billions…

Actually, no…

Trillions of dollars in equity is just lying around waiting to be deployed in any number of ways.

All you need to if you’re an owner is sell or take out a home equity line of credit.

Door #1 – Take the money and run

To quote The Steve Miller Band: “C’monnnnnnn take the money and run.”

The first and most obvious option if you’re interested in tapping the equity you’ve built in your home is to sell, sell, sell!

While many homeowners might consider taking out a home equity line of credit or staying in their homes and continuing to pay off the mortgage, selling should be a serious consideration if you’ve crossed the 30% equity threshold. 

• Big-time cash

When you sell your home and you’ve earned more than 30% in equity, you’re going to get a big lump-sum payment. That payment can be used in any number of ways, from paying off other debts you might have (student loan debt, medical debt, etc.) to diversifying your investment portfolio (e.g., moving that money from a singular entity such as a home, to a collection of entities such as stocks, bonds, and a smaller property such as a condo).

Cash is freedom, and selling your home leaves you with a boatload of options.

• Avoid a dip

Despite the high interest rates plaguing the market, real estate prices are still red hot due to a shortfall in supply. If you decide to sell now, you can capture what’s sure to be a great deal of earned equity (and depending on just how much equity you’ve built, you won’t need to worry about dealing with a mortgage if you buy a new property).

But, more importantly, you can avoid any decline in prices as more housing supply comes online and rates remain above 6% or 7% (which they’re sure to do given the Federal Reserve’s most recent announcement).  

• Dodge the tax man

Did you know that owners who’ve lived in their home for at least two years are eligible for capital gains tax exemptions?—Up to $250,000 for single owners and $500,000 for married couples.

Selling now means you can walk away from your property with major tax-free gains…gains that you can repurpose in a variety of ways, from buying a new primary residence to buying an investment property to putting in the stock market. 

Door #2 – Tap the credit market
Selling is by no means the only option to get a bag full of cash if you’re a homeowner with a solid equity position—there’s always the home equity line of credit (HELOC). While interest rates are far less favorable than they’ve been in recent years, for those who don’t like the idea of moving right now (e.g., those with kids in school), taking out a line of credit can be an excellent option.

• Living with more comfort

For those living in homes that might be outdated or too small, a home equity line of credit is the perfect way to obtain the capital necessary to modernize or expand a home.

Using a line of credit to invest in necessary construction isn’t frivolous, it’s smart, as doing so increases the value of the property. In many cases, the uptick in value instantly covers the cost of taking out the line of credit in the first place. 

• Planning for the future

Adding an accessory dwelling unit—especially for those living in desirable, urban areas such as Los Angeles—is something of a no-brainer. It’s an easy way to not only increase the overall value of a property, but also create a source of steady income that can be tapped for years to come. Unfortunately, building an ADU takes a sizable chunk of change.

Realistically, you’re not getting one built for less than $200,000. So, unless you’ve got a pile of money lying around, the only way to come up with the necessary cash for construction is through a home equity loan. 

• Flexible cost

Unlike other types of loans, a home equity loan is flexible in terms of interest owed—the bank might give you $300,000 in your loan, but if you only withdraw $100,000, you don’t pay any interest on the remaining $200,000.

For those owners who know they have small projects (e.g., remodeling a master bathroom) they want to complete, but are unsure how they might want to use the full line of credit, it’s good to know you’ll only need to pay interest on the amount of money you actually use. 

Door #3 – Do nothing
Of course, there’s a third and final option that homeowners should consider:

Leaving the equity alone. 

Owners are under no legal, moral, or financial obligation to tap the trillions of dollars in equity they’ve built in their homes. 

Granted, doing nothing isn’t as exciting as selling/reinvesting or taking out a line of credit, but there are plenty of good reasons to just kick back and do nothing. 

• It’s safe

You can’t lose what you don’t put on the table as they say in gambling, and as we all know, the real estate market can move up as easily as it can move down. Depending on your timeline and your patience, it might not be worth risking the equity you built in your home on a new venture.

• It costs nothing

Whether you’re selling your home or taking out a line of credit, there are costs to consider and fees to pay before you can get your hands on that equity. For example, a line of credit will come with origination fees and a home sale will come with various costs, from agent fees to the cost of prepping and staging for listing. If you’re not interested in dealing with those expenses (minor though they may be) doing nothing is a great option.

• No tears

If you’ve lived in your home for a long time—especially if you’ve started or raised a family in that home—there’s undoubtedly going to be some kind of emotional attachment to the property that stretches from the foundation to the rafters.

Saying “goodbye” to somewhere you’ve lived for decades can be tough, and for some people, not having to go through this emotional exercise is as good a reason as any to sit still. 

What should you do?
Sadly, I can’t tell you what to do without learning a little bit more about you, your situation, and your goals. When it comes to selling versus staying versus borrowing, there is no “one-size-fits-all” recommendation. 

Therefore, the first thing you should do is talk to me, give me a call at 310-853-0335 or shoot me an email at ShannonShue@KW.com.

Tell me what you’re thinking about doing and why. Let’s talk about your property, discover how much equity you’ve built, and get clear on your goals are for both the near-term and the long-term. 

Only after having an open and honest conversation can I make the recommendation that’s most likely to meet your needs.

Until next time…

-Shannon