In what can be considered part two to last week’s post on whether our home is the best financial investment, I want to take a look at one common practice that was not mentioned last time: Borrowing from the house.
Indeed, the ability to build up equity in a home and to borrow against it is considered one of the greatest financial “hacks” of modernity. It works like this: You buy a house and build equity in it by paying down your mortgage. All the while (assumedly), the value of your home appreciates. Then you can borrow against the now higher value of the equity that you have built up in the house.
Here’s a hypothetical example to illustrate: You purchased a $200,000 home some time ago and you’ve paid off $100,000 of it—meaning you have 50% equity in the property. In the intervening time, the value of the house doubles to $400,000, and so that 50% equity stake has appreciated to $200,000. So you theoretically have an extra $100,000 now to “borrow” from. Not only that, the interest on what you borrow is sometimes even tax-deductible! Sounds like free money, right? [Read more…]