Home equity has hit a record high. How can you best take advantage of your home equity gains?
As home prices continue their rapid rise, many Americans are sitting on a pile of equity in their homes. Indeed, research firm Black Knight found that tappable home equity hit a record high in the third quarter of 2021. And this is occuring as home equity loan rates remain fairly low. For some, that has meant taking out a home equity loan (see the lowest rates you can qualify for here) or a HELOC (see the lowest rates you can qualify for here) for things like a home renovation, and for others that’s meant selling the property.
MarketWatch Picks recently got an interesting question from a reader looking to do something a little different: Lock in the gains on his home, without having to sell or take out a loan, before home values drop. Here’s his question:
Recent home sales in my neighborhood indicate that my wife and I are sitting on a lot of equity in our home – more than $300,000 after our mortgage balance. We plan to sell in a few years but can’t move now. Is there any way we can lock in these gains before home values drop?
And here’s what the experts told us: The strategies for cashing in on a big bump in home equity typically involve selling the property – which you don’t want to do now – or borrowing against your home equity. And while there are a few ways to hedge your home value without moving, the options range from somewhat complicated to extremely complicated.
One option? You could take out a futures contract offered by the Chicago Mercantile Exchange against home price indexes. Brad Ziegler, the alternative investment editor of Wealth Management Magazine, gives an example of using a contract to guard against a loss in home value. But there are a lot of costs, including opening a sizeable account with a futures trader, and if home prices go up, it’s possible to lose money with a futures contract. So most experts say, this is a no-go for individual homeowners. “None of the professionals who broker housing futures contracts would say that housing futures were appropriate for individual homeowners,” Ziegler said. And John Dolan, an independent market maker for the CME Case Shiller home price index who also runs the Home Price Hedging Fund LLC, added that, “This is something for a commercial interest or a very large well-heeled real estate investor who understands the intricacies of this very illiquid market.”
Kurt Fillmore, founder and president of Wealth Trac (cq) Financial in Bingham Farms, Michigan, came up with a simpler hedging approach for one of his clients. Assuming that the share price of publicly traded home builders would fall if home prices declined, Fillmore purchased a one-year put option that allowed his client to sell shares of homebuilder stocks at a fixed price. If home prices fell and pushed down the price of home builder stocks, the client could buy the cheaper shares and sell them at the higher price fixed in the option. “It wasn’t a big bet,” Fillmore said. “It was $1,000 for the hedge and the price of the home went up more than that, so there was no problem.” But again, that’s complicated.
So the best bet could be to turn to the more common uses for home equity loans —see the lowest rates you can qualify for here — which are at very low rates now. Using equity to pay down credit card balances and other high-rate debt gives you an immediate return on the difference between the two rates. Using equity cash to make improvements that add to the home’s value is another option or, if you can be a disciplined long-term investor, you can take out cash to invest.
Your best bet may to just be glad your home value has soared, said Harry Glanz (cq) of Capital Mortgage Funding in Southfield, Michigan. “In three more years, you’ll have paid down three more years of principal on your mortgage, which could offset any loss in value,” Glanz said. “When you put your head down on your pillow at night just remember that you haven’t taken on any new risk and you’ll still walk away with a lot of equity.”
