How your home can help you 'renovate' your finances

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A house is more than a place to live and raise your family. Here are some ways the equity you've built up could help you pursue other important goals.
After years, or even decades, in a family home, it might seem unthinkable to say goodbye to this repository of memories. Your house could feel like a member of the family, a participant in all of those holiday gatherings, raucous playdates, laughter-filled meals, and to sell it for mere financial reasons could seem like a betrayal of sorts. But once the kids have grown up and moved on, that same house or apartment — and the equity you may have built up in it — could provide the means for you to help realize your goals as you transition to the next phase on your journey.
Clearly, downsizing from an empty nest to a smaller, more affordable home can be a smart financial decision. But it can be a very tough one emotionally. "People might know intellectually that their home is a financial asset, but they think of it in emotional terms — as the place where they raised their kids, where they want to grow old," says Bill Hunter, director, Institutional Retirement Wellness & Planning, Retirement & Personal Wealth Solutions at Bank of America. Still, Hunter adds that ignoring an asset that may be worth hundreds of thousands of dollars would be a mistake. "It's critical that you examine all the financial resources you can bring to bear when figuring out a plan for pursuing your goals," agrees Lorna Sabbia, head of Retirement & Personal Wealth Solutions at Bank of America.
Three ways to take equity out of your home. Featuring a chart with three options for cashing out your equity, the graphic highlights the following attributes for each one: what you get, the interest rate, similarities to other financial options and risks to consider. The first option is a home equity loan. What you get: A lump sum in cash, backed by your equity. Interest rate: Fixed (usually). Similar to: A second mortgage. Risks to consider: Borrowing more than you need. The second option is a home equity line of credit. What you get: Access to cash as needed during the term of the loan, up to a set amount. Interest rate: Variable (usually). Similar to: A credit card that's secured by your home. Risks to consider: Interest rate increases. The third option is a cash-out refinance. What you get: A new, bigger mortgage and the chance to cash out part of your home equity. Interest rate: Can be fixed or variable. Similar to: A mortgage (because that's what it is). Risks to consider: Decline in the value of your home; taking on additional debt; potentially more interest over the life of the loan.
So what role should your home play in your overall financial picture? And how can you take advantage of the home equity you've built up?

Is home ownership a good investment?

Of course you're not guaranteed a huge payout when you sell your residence. How much equity you have in your home is largely dependent on how long you've owned it, how large your initial down payment was and how high home prices are in your area at any given time.
Your home might end up being the biggest asset on your balance sheet.
— Matthew Diczok,
fixed income strategist,
Bank of America
"The housing market has staged an impressive recovery following a brief downturn as a result of the coronavirus shock," says Alex Lin, Senior U.S. Economist at BofA Global Research. "Existing home sales have been hot, running in excess of levels reached prior to the pandemic. With historically lean inventory, builders are ramping up construction, but they too have been constrained by the supply side, limiting the upside for housing starts. The combination of strong demand and tight supply has resulted in double digit home price appreciation, which may continue through 2022." Lin adds that over the longer run, it's likely home prices will settle at an annual growth rate of 3%–4% per year, matching the rate of income growth. "A diversified portfolio of stocks and bonds has traditionally returned more," says Matthew Diczok, a fixed income strategist at Bank of America. But surprisingly, 44% of Americans don't even own stock.Footnote 1 The typical homeowner usually dedicates 20%–30% of their gross income to their mortgage payment, and over the years those steady payments can really add up.

Living in your biggest asset

"Your home might end up being the biggest asset on your balance sheet," Diczok says. The average American has a net worth of just under $98,000, but according to U.S. Census Bureau data, nearly 70% of that is home equity.Footnote 2 "That's why it's critical to look at how your home's value fits in with your other investments," he adds.
From an investing standpoint, that can mean a number of things. "Some people," Diczok says, "may feel comfortable taking on a little more risk in the way they approach the markets, knowing that they have a portion of their net worth invested in a relatively stable asset — their home." Others may see an advantage in being able to draw on their home equity to cover emergency expenses, rather than selling off shares in their portfolio. That way they don't miss out on any potential market growth. If the expense is large, however, taking out a home equity loan or line of credit could put your home at risk — if you can't pay off the loan you could lose your house.
There are three main ways to tap your home's value while you're still living there. The best choice for you will depend on interest rates and what you need the money for.
— Marie Imundo,
director, Wealth Management Mortgage Strategy and Execution,
Bank of America

3 ways to tap your home equity

You don't have to sell your home to put your equity to work for you, of course. "There are three main ways to tap your home's value while you're still living there," says Marie Imundo, director, Wealth Management Mortgage Strategy and Execution, Bank of America. They are a home equity line of credit (better known as a HELOC), a home equity loan (sometimes referred to as a HELOAN) and a cash-out refinance. "The best choice for you will depend on interest rates and what you need the money for."
With a cash-out refinance, you get a new loan, ideally at a lower rate, to pay off your existing mortgage, plus some additional money from your home equity, which you might use to cover a home renovation project, or to help you manage any number of other current expenses. Cashing out your home equity is an option you might want to consider if you have a first mortgage on which you're paying a higher interest rate than is currently available. "Keep in mind, though," says Imundo, "that your new loan balance will be higher than your current loan, leaving you with a larger mortgage, typically a higher monthly payment (depending on available interest rates) and the possibility of having to pay more interest over the life of the loan."
"What if your current mortgage rate is already low? Then you may want to consider tapping into home equity through a home equity loan or a line of credit," Imundo says. The difference between the two? Home equity loans are for a fixed amount and are often made at fixed rates of interest. Home equity lines of credit give you access to a set amount of credit, but you don't have to use it all or all at the same time. You can tap that credit — and pay it off — as you need it during the "draw period," or the term of the loan. Home equity lines of credit are often made at variable rates of interest, though you can find fixed-rate options.
A home equity loan may make the most sense for a fixed expense — say college tuition that you might want to pay off over a number of years — while generally a home equity line of credit is used for recurring items, like home renovations, which may require frequent and varied withdrawal amounts.
One thing you should never consider using your home equity for, notes Imundo, is investing. Stocks, bonds and mutual funds fluctuate in value, and you wouldn't want to risk losing your home if the return on your investments is not sufficient to cover a new mortgage, loan or line of credit. If the value of your investments were to decrease, you might need to sell them to protect your home and limit further losses.

When the tuition bill comes due…

For some families, a HELOC can offer a way to finance a child's annual college tab and could present a more attractive option than selling stocks, which may subject you to capital gains taxes. It could also mean reducing your stock holdings at a time when the market may be appreciating. Keep in mind, though, that a solution that's appropriate for one family might not work as well for another.
Because the client intended to sell his home and downsize once his daughter graduated, the long-term impact of rising interest rates on the cost of a variable rate HELOC likely was not going to be a significant consideration at that point in time.
Of course, another solution may be more appropriate for a different family. There are no one-size-fits-all answers in wealth management.

The hidden benefits of downsizing

Many retirees decide to downsize in retirement, and doing so comes with potential added benefits — you can cut many home-related expenses. The Center for Retirement Research at Boston College found that empty-nesters were spending 30% of their income on property taxes, insurance, maintenance and utilities.Footnote 3
The question for downsizers then becomes what to do with all of the unleashed capital. "There's no single right answer," says Imundo. Solidifying your goals and reviewing all of the options can help you figure out what might work best for what you want to achieve. Then you can move on to focus again on the people and things that matter most to you — and create new memories, perhaps in new places.
Next steps

Footnote 1 Gallup, "What Percentage of Americans Owns Stock?," August 13, 2021.

Footnote 2 U.S. Census Bureau, "Wealth, Asset Ownership, & Debt of Households Detailed Tables: 2018," September 2021.

Footnote 3 Center for Retirement Research at Boston College, "Is Home Equity an Underutilized Retirement Asset?" 2017.

BofA Global Research is research produced by BofA Securities, Inc. ("BofAS") and/or one or more of its affiliates. BofAS is a registered broker-dealer, Member SIPC popup, and wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").