Personal Finance > Your Home
Milking the 'bubble'
Your house has soared in value. Here's how to capitalize.
June 7, 2002: 7:49 PM EDT
By Jeanne Sahadi, CNN/Money Staff Writer

NEW YORK (CNN/Money) - On paper, you're a fat cat, one of those lucky folks whose home is worth far more than when you bought it.

But while you may be sitting on tens or even hundreds of thousands of dollars in gains, it's far from money in the bank.

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That's because there's always a risk that home prices in your area will hit the skids. That scenario is especially worrisome these days as economists debate whether or not we're in a housing bubble. So how can you ensure you get the most out of your home regardless of what happens to the housing market?

You have several options, but each comes with a risk. Deciding which is the smartest move depends on your needs and your appetite for taking a gamble.

Here are some of your options.

Tap equity to make home improvements. You've always wanted a gourmet kitchen and you know they tend to increase resale value. But those granite countertops and Sub-Zero refrigerators cost a lot of caviar.

  graphic  Also in this series ...  
Is this a bubble?
How hot is housing?
Buying at the top
Bubble-proof places to live

To foot the bill, you can always take out a home equity line of credit (HELOC), which lets you borrow money against the equity you've built up, including the principal you've paid and any appreciation in your home's price (for more on the pros and cons, click here). With a HELOC you only take money as you need it and only pay interest on the amount you've taken.

If you bought your home for a song years ago and are confident you'll reap a gain when you sell, even if prices in your neighborhood depreciate, a HELOC-financed renovation that improves resale value can make a lot of sense.

But if you've owned your home only a few years, stretched yourself thin to buy it and plan to move well before your mortgage is up, think twice before financing a renovation that will make your house one of the priciest on your block. For resale purposes, "Be careful you don't over-improve for the neighborhood....It's best to be the least expensive house in an expensive area," said certified financial planner Barbara Steinmetz of Burlingame, Calif.

Tap equity to pay off credit card debt and school loans. You can tap money from a HELOC or a refinancing to pay down other debt, and there are three advantages to this strategy.

First, you're likely to drastically reduce the interest you pay since HELOC and refi rates are far less than those on credit cards. (click here for more on how to refi)

Second, you'll get to take a tax deduction for the interest you pay. And third, wiping out credit card debt and loans will improve your chances of buying another home since "all of that debt counts against you if you go to buy again," Steinmetz said.

The downside? You put your home on the line to pay off your credit cards. That is, if you default on your payments, you risk foreclosure. So make sure you can afford to make your monthly payments in full and on time.

Tap equity to diversify your investments or improve your lifestyle. Home equity is likely to be one of the biggest portions of your wealth after you've paid down your mortgage significantly. From an asset allocation perspective, you may want to diversify and, if you're retired, boost your cash flow.

Certified financial planner Phil Storms of Denver had a retired client who had $100,000 in investments and owned his home outright, which today is worth $200,000 or nearly four times what he paid for it. Living off his defined benefit pension and Social Security payments, he was looking for more income to improve his lifestyle.

The client took out a $100,000 30-year mortgage at 6.75 percent and used the money to invest in dividend-paying stocks, a majority of which were real estate investment trusts (REITs) with solid track records. The REITs pay an average of 8.5 percent in dividends, which after tax yield him more income than he pays in mortgage interest.

Refis are another way to boost cash flow if you're willing to forego a mortgage-burning party. Say you own a $200,000 home, have $75,000 left to pay over 11 years at 7.75 percent and your monthly payment is $846. If you refinanced the $75,000 to a 30-year mortgage at 6.5 percent, your monthly payments drop to $474, and you'd get a much higher tax deduction for the interest.

Sit tight. You love where you live and have faith that if you stay long enough you'll net a nifty gain. After all, the longer you stay, the more equity you acquire and the better your chances of seeing home appreciation. Nationally, home prices have risen an average of 6.3 percent a year since 1968, according to the National Association of Realtors.

Of course, averages are cold comfort if prices are depressed when you need to sell. Say seven years ago you bought a $200,000 home with $40,000 down. Since then you've paid off an additional $15,000 in principal, giving you $55,000 in equity and a mortgage balance of $145,000. If all of a sudden you have to relocate for work and your house only fetches $140,000, you'll owe your lender $5,000.

So how hot is housing?
Refi anyone?
Time to tap home equity?

Sell and move. The best -- indeed, the only -- way to truly bank the appreciation in your home is to find an eager buyer. And face it, the temptation to pocket up to $250,000 in gains tax-free if you're single ($500,000 if you're married filing jointly) is hard to resist. But before posting a "For Sale" sign, ask yourself why you're doing it.

Is cashing in your sole motive? Disrupting your life just for money is usually a bad idea. "Your house is your home's not an investment asset," said certified financial planner Jon Duncan of Tacoma, Wash. "Why sell a house you enjoy living in?"

Well, maybe you're convinced you can find another, less expensive house you'll enjoy. If you anticipate prices in your area will fall, you may decide to sell at what you believe is the top of the market, rent for a while and then buy back when prices slide. Good luck. "There's no way to time the real estate market," Duncan said. If the market takes longer to soften than you anticipate, you end up spending more in rent than you'd like and forfeit mortgage write-offs. If the market doesn't soften at all, you may find yourself priced out of your old neighborhood when you go back to buy, Steinmetz said.

Or maybe you're planning to move to a less expensive area. Do your homework. Make sure the place you're going to offers more than a price break. Otherwise, if you're unhappy, you may want to hightail it back to your old stomping ground...and, again, find you've been priced out of the market, Steinmetz said.  Top of page