Home Values Are Up. Here’s How to Use That to Your Advantage

What can a higher home value do for you? A lot, actually.

Given the state of the U.S. economy over the past year, you'd think home values would be sluggish. But actually, home values have soared in the course of the coronavirus pandemic. We can thank low housing inventory and competitive mortgage rates for that.

In fact, in December 2020, the median price of an existing home sold was $309,800. That's a 12.9% increase compared to the year before and the highest December median home price on record.

If the value of your home has climbed over the past year, you may be able to use that to your financial advantage. Here's how.

1. Do a cash-out refinance

With a cash-out refinance, you swap your existing home loan for a new one with a higher mortgage balance. You'll then get the option to use that excess cash as you please.

Here's how this type of refinance might work in practice. Say you owe $200,000 on your home and you're looking to do a $40,000 renovation you can't pay for outright. If your home value has soared to $300,000, a mortgage refinance lender might easily agree to let you borrow $240,000. You'd use the first $200,000 to pay off your existing loan. And you'd get a check for the remaining $40,000, allowing you to use it for any purpose whatsoever.

Of course, to do a cash-out refinance, you need to have enough equity in your home. Equity is the portion of your home you own outright, calculated by its market value minus your mortgage balance. In the example above, you'd be looking at $100,000 in home equity for a property worth $300,000 with a $200,000 outstanding mortgage balance. But during periods where home values decline, you'll have less equity, so if you want to borrow against yours, it pays to do so when property values are up.

2. Sell your home and downsize

The problem with selling a home in today's market is that what you gain in the form of a higher sale price, you stand to lose when you buy a replacement home. You may have to pay a premium when you buy.

But if your home's value has spiked and you've been thinking of downsizing, now may be a good time to do so. Depending on how the numbers shake out, it's conceivable you could sell your home at a high enough price to buy a smaller property outright (meaning, without a mortgage).

Going back to our example, say you sell your home for $300,000 and pay off your $200,000 mortgage. Given the demand for homes, you may not even need to use a real estate agent. Your real estate transfer taxes (a fee home sellers are charged by their state) may also be minimal. As such, you may have nearly $100,000 left. If you find a condo for $100,000, there's a chance you could buy it without having to take on a new mortgage at all. And even if you can't cover the entire cost, you may be able to cover the bulk of it and take out a really modest mortgage that's extremely easy to fit into your budget.

As a homeowner, high property values could really work to your benefit. Think about the things a higher home value can do for you. Then, if you're ready to make a change, jump on those opportunities sooner rather than later -- before the housing market cools off and home values begin to decline.