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
- 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
- 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.