Making Home Equity Work for You

By Cheryl Allebrand
Bankrate.com

If you're like most Americans, your home is your most valuable asset and your mortgage payment is almost certainly your largest monthly payment. With so much money tied up in one item, it's important to have a plan in place for using your home to reach your financial goals and to understand the role your home plays in your overall financial picture.

Is it smart to take out a home equity loan for home improvements? Is it wise to tap equity for higher education expenses? Should you scrimp to make extra payments to principal each month?

How you treat your home's equity depends on your particular financial situation, says Carmen Petote, a Certified Financial Planner at Allegiance Financial Advisors in Pittsburgh. Here Petote takes a look at possible uses of home equity.

If Your Goal Is Heading to Retirement ...
"Get all debt paid off by retirement," Petote says. "The less debt, the more control you have over your finances and decisions." While not everyone has that goal for their mortgage, as a homeowner any equity you have in your home is similar to money in the bank and can only help you when you retire. That said, there are three things to think about before funneling money into your home:

1. 1. Pay down highest interest rates first. While it's important to look for the highest rate of return when investing, when repaying debt, work to eliminate your highest rates first.

    

2. 2. Fully fund 401(k)s. Always take advantage of employer matching contributions. In fact, Petote recommends maxing out your retirement plan before funneling extra money into building home equity. Matching funds are essentially free money and Petote advises putting as much money away as possible. "Even if your employer matches 25 percent, that's better than I can do even on my best day," he says. "And it probably exceeds the return you would receive on your home."
3. 3. Defer prioritizing home equity if home values depreciating. When the housing market in your area is sliding, Petote suggests investing in higher return portfolio investments first. Many people count on the equity in their home to help sustain them in retirement, but a house is not always the high-yield investment it first appears to be. Petote advises checking the annual return. Let's say you look at your house after 20 years and see that it's tripled in value, you might think that type of equity growth will continue. "That's deceiving," says Petote. "If you look at annualized return, it's probably in the 2 (percent) to 4 percent range." He says it's best to invest wisely with a professional than "just sinking the money into your house." Invest in the house after maxing out your retirement plan, when putting money into the house becomes a debt reduction issue.

Next: "If your goal is building home equity ... " >

Bankrate.com is the Web's leading aggregator of information on financial products including mortgages, credit cards, new and used automobile loans, money market accounts, certificates of deposit, checking and ATM fees, home equity loans and online banking fees. Visit Bankrate.com to get the tools and information that can help you make the best financial decisions.

Home may indeed be where the heart is, but it also houses a great deal of financial leverage and security.

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