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Lets say my home's value appreciates considerably. How can I take advantage of this?

I'm unwilling to downgrade (all the other houses in my area has also appreciated, so if I sell and re-buy, I would end up with a smaller house).

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Assuming "take advantage" means continue to build wealth, as opposed to blow it all on a fancy holiday...

Downgrade As you already note, you could downgrade/downsize. This could happen via moving to a smaller house in the same area, or moving to an area where the cost of buying is less.

HELOC Take out a Home Equity Line of Credit. You could use the line of credit to do home improvements further boosting the asset value (forced appreciation, assuming the appreciation to date is simply market based). Caution is required if the house has already appreciated "considerably" - you want to keep the home value within tolerance levels for the area. (Best not to have the only $300K house on a street of $190K-ers...)

Home Equity Loan Assuming you have built up equity in the house, you could leverage that equity to purchase another property. For most people this would form part of the jigsaw for getting the financing to purchase again.

  • For "HELOC", you say "use the money". What money? – Vivek Maharajh Jan 24 '16 at 4:44
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    HELOCs provide a line of credit, allowing you to draw funds up to your maximum credit line as needed. – gef05 Jan 24 '16 at 4:46
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    Yep. It can be a fine line as to whether it fits a person's requirements - as you note, the timing can be a real issue with the HELOC approach. – gef05 Jan 24 '16 at 4:50
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    You're in the US (I just looked). The interest on the HELOC could be tax deductible - depends on your personal circumstances. – gef05 Jan 24 '16 at 5:11
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    @vivekmaharajh, be cautious: investments that can have a return of 8% usually don't guarantee such returns, and, most importantly, don't guarantee the capital either. So you could end up with less money that you started with, and still be liable for repayments of your Home Equity Loan. If you don't do those repayments, you could then lose your home! – jcaron Jan 24 '16 at 10:35
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There are basically two ways to get value out of an appreciating asset such as a home:

(a) Sell it and take the profit. In the case of a home, you presumably still have to live somewhere, so unless you buy a cheaper home to replace it, this doesn't get you anywhere. If you can get another house that is just as nice and in just as nice a location -- whatever you consider "nice" to be -- than this sounds like a winning option. If it means moving to a less desirable home, then you are getting the cash but losing the nice home. You'll have to decide if it's worth it.

(b) Use it as collateral for a loan. In this case, that means a second mortgage, home equity loan, or a home equity line of credit. But this can be dangerous. House prices are very volatile these days. If the value of the house falls, you could be stuck with debts greater than your assets. In my humble opinion, you should be very careful about doing this. Borrowing against your house to send the kids to college or pay for your spouse's life-saving operation may be reasonable. Borrowing against your house to go on a fancy vacation is almost surely a bad idea. The vacation will be over within a couple of weeks, but you could be paying off the debt for decades.

  • I was more thinking along the lines of borrowing 20% and investing it in some broad stock index. Seems like this is even more reasonable than the already reasonable options you suggested. Thanks. – Vivek Maharajh Jan 24 '16 at 7:29
  • If you will be using the money for investments. Assume that the money is gone (or at least untouchable). You have to be able to make the new loan/line of credit payments from your income. – mhoran_psprep Jan 24 '16 at 12:12
  • Agreed. That is why I am only considering borrowing 20%. I can repay it from other sources of the investment plummets. – Vivek Maharajh Jan 24 '16 at 17:33
  • @mhoran_psprep Well, if the investment proves profitable, he could presumably cash out a percentage of the profit to make payments on the loan. Assuming it's an investment like stocks, as the OP says, where you're not committed to leaving the entire amount for some period of time. – Jay Jan 25 '16 at 14:03
  • Yes, certainly possible. Note that there's risk to this plan: If you get (say) a home equity loan, invest it in the stock market, and then the stock market goes down, you still have to repay the debt. Of course if the market goes up then you are making a profit off of an asset (your home) at the same time that you are using it, which is practically free money. It's all a matter of how much risk you can tolerate. – Jay Jan 25 '16 at 14:05
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There might just not be anything useful for you to do with that 'value'. As others mentioned, HELOCs have their risks and issues too. There is no risk-less way to take advantage of the value (outside of selling)

It is similar to owning a rare stamp that is 'worth a million' - what good does it do you if you don't sell it? nothing. It is just a number on a sheet of paper, or even only on some people's minds.

  • I wasn't looking for a risk free approach. Just a reasonable one. The home equity loan suggestion by other folks seems quite reasonable. – Vivek Maharajh Jan 24 '16 at 17:31
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Even selling isn't riskless. Sure, your house has gained value-- but unless that's due to improvements you made to it, every other house in the neighborhood you might buy has gained value too, so moving might not result in extracting any net value.

This is one of the reasons I keep reminding folks that a house is not an investment. It can be a business, if you're renting it out. But if you're occupying it, it is simply housing. If you are lucky you'll make a profit if and when you sell it, but don't count on that.

It does store value, but except for taking loans against that it's had to access that value. And lower loan rates than you'd otherwise pay are not a huge value when you'd save more if you don't borrow at all.

The only use I'm making of my house's value is that by taking a very-low-rate mortgage when I could have paid cash I was able to leave more money in my investments -- arguably the safest leveraged investment possible.

  • "Sell and move" really depends on where you move to. E.g. selling a place in the Bay Area and moving to many places in the midwest (or really almost anywhere else) could net you quite a bit of cash after buying a similar, or even better, property. The other direction, not so much :-( – jamesqf Jan 24 '16 at 19:39
  • Granted. But it isn't at all clear that the gains from owning-then-selling in the Bay area are better than investing in more traditional ways. Consider what happened to property values just a few years ago... And homes require upkeep. It really is safer and wiser to treat homes as a separate category from other places you might put yourmoney. – keshlam Jan 24 '16 at 20:06

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