By Kathy Kristof
WHEN I TOLD MY 19-YEAR-OLD SON that I’d decided to sell the house he’d grown up in, his usual tough-guy act evaporated. He and three friends sat in my kitchen and wiped away tears. If the near-acre of land on which our two-story home sat had been easier to maintain—or if there were kids still living in any of the four bedrooms—I might have had a change of heart then and there. Instead, I took a deep breath and asked them to trust me.
Clearly, downsizing from my empty nest to a smaller, more affordable
home was a smart financial decision. But it was also 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 Gao-Wen Shao, director of
Retirement Solutions at Merrill. Still, Shao 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.
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?
“Your home might end up being the biggest asset on your balance sheet.”—Matthew Diczok, Fixed Income Strategist, Merrill Wealth Management and Bank of America Private Bank
Is Home Ownership a Good Investment?
Thanks to the equity I’d built up, I ended up with a nice profit
when I sold my home, but not everyone is so lucky. 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.
“Home price appreciation has been slowing since the middle of 2018
as prices in some regions became too high relative to income growth,”
says Michelle Meyer, head of U.S. Economics at BofA Merrill Global
Research, adding that national home prices are expected to settle at a
3% year-over-year pace. This aligns with the fact that, over the long
term, the typical home only appreciates 3% to 4% per year, according
to the Federal Housing Finance Agency.1 Stocks and bonds have
traditionally returned considerably more, agrees Matthew Diczok, Fixed
Income Strategist, Merrill Wealth Management and Bank of America
Private Bank. But here’s the thing: Few of us invest 20% or 30% of our
gross income in the stock market every month.2 The typical homeowner usually
dedicates that much 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. For half of all 35- to 54-year-old couples, for example, home equity represents 51% or more of total net worth, according to U.S. Census Bureau data.3 “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, Senior Vice
President of Mortgage Product Strategy, Global Wealth and Investment
Management at Bank of America
3 Ways to Tap Your Home Equity
You don’t have to sell your home, as I did, 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, senior vice
president of Mortgage Product Strategy, Global Wealth and Investment
Management at 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 potential 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 a home equity line of credit is generally 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
When the Tuition Bill Comes Due…
Stephen Stabile, a New York City-based Merrill Financial Advisor, recalls how he once provided access to Bank of America to help a client finance his daughter’s $50,000 annual college tab with a home equity line of credit, or HELOC. The client had originally planned to pay the tuition by selling stocks, but this would have subjected him to capital gains taxes and forced him to reduce his stock holdings at a time when the market was appreciating rapidly. Because the client intended to sell his $2 million home and downsize once his daughter graduated, the long-term impact of rising interest rates on the cost of a variable rate HELOC was not likely to be a significant consideration at that point in time.
“In the end, all of the pieces fit together perfectly,” Stabile
says. “Of course, another solution may be more appropriate for a
different family. There are no one-size-fits-all answers in wealth
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. CRR found that empty-nesters were spending 30% of their income on property taxes, insurance, maintenance and utilities.4
The question for downsizers then becomes what to do with all of the unleashed capital. There’s no single right answer, says Imundo. You and your advisor can look at all of the options to help figure out what might work best for what you want to achieve.
In my case, I ended up finding a smaller house, with a smaller yard, but with lots of adult-friendly amenities. My misty-eyed son and his friends dried their tears quickly when they realized that my form of downsizing involved buying a house that came with a swimming pool and a pool table.
In fact, it’s all worked out so well that I’m thinking of tapping my
home equity and downsizing yet again—when I stop working. Next time,
I’ll use the funds to subsidize my yen for travel.
Kathy Kristof is an award-winning personal finance and investing
journalist who writes frequently for a variety of major
publications. She is the author of Investing 101 and Taming the
Tuition Tiger. Find more of her reporting at
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1 Federal Housing Finance Agency, “U.S. House Prices Rise 1.4 Percent in First Quarter,” 2017.
2 Bloomberg, “Housing’s 30-Percent-of-Income Rule is Nearly Useless,” July 2014.
3 U.S. Census Bureau, “Wealth, Asset Ownership, & Debt of Households Detailed Tables: 2013,” 2013.
4 Center for Retirement Research at Boston College, “Is Home Equity an Underutilized Retirement Asset?” 2017.
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