Thursday, November 12, 2015 / by Matthew Freda
Posted: 12 Nov 2015 04:00 AM PST
There has been much written about how dramatically home values have increased over the last several years. With the increase in values, comes an increase in the equity each home owning family now has. The Joint Center of Housing Studies atHarvard University recently reported that, after taking inflation into account, aggregate home equity has increased 60% since 2010. Home equity is the major component of most family’s overall wealth.
Why is this so important?
Throughout history, families have tapped into their homes for many important reasons. Perhaps it was to get seed capital to start a new business; perhaps to help finance their children’s college education; perhaps to get needed medical attention not covered by insurance. Up to ten years ago, families were able to use the equity in their homes to better the living situation for themselves and their family. More small businesses were created. College students weren’t forced to take on massive student debt. People could get needed medical care. This hasn’t been the case over the last ten years as families found themselves in a position of having zero equity or, even worse, negative equity post the housing collapse. However, that is about to change.
Using your home as an ATM is not a good idea.
We realize that there are inherent risks to tapping into the equity in your homeespecially if you do it for the wrong reasons. Back in 2005-2007, homeowners were using their homes as their own personal ATM machine to buy depreciating assets like cars, boats and jet skis. This reckless behavior should never be repeated. However, using your equity (aka family wealth) to invest in yourself, your children or other family members that could use help still makes sense. And the good news is that more and more families can do this as home values continue to increase.
Home equity gives families an additional financial option when money is needed. The proper use of this family wealth can be used to grow generational wealth. As Julián Castro, U.S. Secretary of HUD, recently explained:
“Generation after generation, the primary vehicle to create wealth in our country has been through homeownership. In the U.S., homeownership has provided an opportunity for one generation to hand over to the next that opportunity and that wealth.”