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The changing market


The real estate "boom" is over, experts say. With change comes both risk and opportunity.

Ballooning equity doesn't mean you're rich
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Do you dream of "cashing out" when the market hits the top, then sitting on a pile of money while you buy a similar home for a lot less? Not realistic, he says.

Just like timing the stock market, timing the housing market is tricky. "Most people aren't that lucky," says Poorvu.

And in the meantime, you have to pay to live somewhere."The right mind-set is to look at your house not as an asset, but as a liability, until you're finally going to sell it and drastically change your living style," he says.

Unlocking your equity
If you feel strongly about tapping into that equity reserve, you really only have a handful of options. The most common:

  • Sell and move to a much less expensive house. A viable plan for some, perhaps, but it does come with major drawbacks. First, if your goal is to improve your lifestyle, you'll be going in the opposite direction. Yes, you'll have money to spend, but is it worth downgrading your living accommodations? If you're in an inflated market, you could still be shelling out a lot for shelter. Plus there are the moving expenses and closing costs associated with your new mortgage. And then there's the possible federal tax on your profit. Individuals are exempted from taxes on up to $250,000 in equity and couples up to $500,000. But after that, you'll owe 15 percent capital gains tax on any profit you make.
  • Stay and tap the equity through refinancing. You can access your new-found wealth with a second mortgage, home equity loan or a line of credit, but the problem there is the money isn't really yours to keep. You have to pay it back, with interest. And if you can't make the payments, you risk losing your home, so make sure whatever you're spending the money on is worth the risk.
  • Stay and get a reverse mortgage. Reverse mortgages allow you to tap your equity while you're in your home. Then, when you sell or die, the note is paid. Downside: Usually reverse mortgages are available only to older homeowners. In addition, reverse mortgages "are complicated products," says Tyson. "You really have to shop around, learn the lingo and comparison shop." Smart consumers need to take some time, do some research and get a little professional advice (preferably with the advice of your personal accountant, attorney or financial planner) to understand all of the details and possible ramifications.
  • Sell and move to a less-expensive housing market. This is probably the most effective way to unlock the equity in your home. The money is yours, free and clear, minus any capital gains taxes. Downside: Since you're selling your home and moving a distance, it tends to work better if you're not doing it just for the equity. Also, your new community might have cheaper housing, but other aspects of life there could be more expensive, says Tyson.
-- Posted: March 1, 2006
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