The refinancing boom that restarts anew each time mortgage rates fall and home prices rise has been a big income-earner for banks and the mortgage finance industry, but it's a myth that it is a "no-brainer" for the homeowner. Each new financing resets the clock on the repayment of principle. It puts the homeowner that much further from building equity, since it's mostly interest that is paid in the early years of the amortization schedule, although there is a great deal of variety, from interest-only to accelerated payback refis.
"Even if you are a baby boomer, you should be thinking of how you manage this asset over 20 or 30 years," says Richmond. "It's a very important asset. You can use it to borrow money, but you really should not borrow against it if it means you are spending more money than you have."
Nestcare's Stucki says home equity should be nurtured over the years so it's there when you need it. "People have to start tallying up different pots of money, including home equity," she says. "It's not going to be enough to have a retirement account and Social Security. Home equity can be used to fill a lot of gaps in financial planning. The question is whether there is enough of it left that will be unencumbered."
The Federal Reserve Survey of Consumer Finance showed that median family net worth fell to the level of the 90s, largely because of home prices, but also due to stock declines. "Unfortunately it's all a crapshoot," says Richmond, who advocates including home equity as part of a diversified strategy and says it should be seen as another way of avoiding putting your entire nest egg in one basket. House prices sometimes hold up better in times of inflation, for example.
"Home equity is certainly important in financial planning. If you are a tenant paying rent, you are not building equity," says Tucker Watkins, private wealth adviser for Ameriprise Financial on home equity. People can also use it to borrow against. In many cases it makes sense, as long as the borrower has full awareness of the impact. Says Stucki: "It should be an orderly drawdown."
Lastly, for seniors at a certain stage in life, a reverse mortgage can be a sensible option because it requires no monthly payments and allows homeowners to stay put. A newly launched "saver" reverse-mortgage option acts as a credit line that draws down only a portion of home equity. Refinancing, too, is an option, but borrowers need to remember that the low rates that bring reduced monthly payments always have some negative impact on the equity you've tried to preserve. There are people who need access to capital for whom it works well, Watkins says, but "it's not for everyone."