Paper Wealth vs. Real Wealth: Understanding Your Home's True Value

Your home's appraised value might suggest you're a millionaire, but that doesn't mean those funds are readily available.

 

In recent years, the U.S. housing market has experienced significant growth. In 2024 alone, the combined value of U.S. homes increased by $2.5 trillion, reaching a total of $49.7 trillion. This surge was driven by low mortgage rates and high demand, leading many homeowners to see substantial increases in their property's value.

 

However, this increase in home value is largely "paper wealth." While your property may be worth more on paper, accessing that equity isn't straightforward. Selling your home involves costs such as agent commissions and potential capital gains taxes. Borrowing against your home's equity through options like cash-out refinancing can lead to higher monthly payments and increased financial risk. In fact, in the second quarter of 2025, cash-out refinance activity reached its highest level in nearly three years, with homeowners pulling an average of $94,000 in equity, resulting in an average monthly payment increase of $590.

 

For many seniors, being "house rich" doesn't equate to financial freedom. A significant portion of their net worth is tied up in their homes, making it challenging to access funds for daily expenses or unexpected costs. This situation underscores the importance of distinguishing between paper wealth and real, accessible wealth.

 

To convert home equity into usable funds, homeowners can consider several strategies:

 

Home Equity Lines of Credit (HELOCs): These allow you to borrow against your home's equity, often at lower interest rates than other loans. However, they come with variable interest rates and the risk of foreclosure if payments aren't met.

 

Reverse Mortgages: Available to homeowners aged 62 and older, reverse mortgages provide monthly payments or a lump sum based on your home's equity. While they don't require monthly repayments, the loan becomes due when the homeowner sells the house, moves out, or passes away.

 

Downsizing: Selling your current home and purchasing a smaller, less expensive one can free up equity. This approach not only provides liquid assets but can also reduce maintenance and utility costs.

 

It's crucial to approach these options with caution. Each comes with its own set of risks and benefits. Consulting with a financial advisor can help determine the best course of action based on individual circumstances.

 

In conclusion, while rising home values can create a sense of increased wealth, it's essential to recognize the difference between paper wealth and real, accessible wealth. By understanding and carefully managing your home equity, you can make informed decisions that align with your financial goals.

@usamortgageconsultant.com