Rising home values are making consumers wealthier

Home values are rising in many parts of the country. According to Zillow, the real estate site, the median value of a U.S. home was $216,000 in May, up 8 percent from a year earlier.

If you plan to sell your home, you'll be happy to hear that. But if you expect to remain in your home, there are still ways to benefit, though be wary of the risks.

Here's what to consider.

You Could Drop Mortgage Insurance

When your home's value rises, your equity does too. According to CoreLogic, a property-data research company, home equity for U.S. homeowners with mortgages grew more than 16 percent in the first quarter of 2018, compared with the same period in 2017.

That increase could save you money if you put down less than 20 percent when you bought your home. In that case, you're probably paying private mortgage insurance (PMI), usually 1 percent of the purchase price, which protects the lender if you default.

If your equity is now at least 20 percent of the original purchase price, you're no longer required to pay for mortgage insurance. On a $300,000 home, that could be a savings of about $3,000 a year, or $250 a month.

What you can do. Contact the company that services your mortgage and ask that mortgage insurance be removed, says Julienne Joseph, assistant director of government housing programs at the Mortgage Bankers Association in Washington, D.C. The servicer will then do its own calculations to confirm. You may have to provide a new appraisal, which can cost from $200 to $400. 

You Could Tap More Home Equity (Though Think Twice Before You Do)

If your home equity has gone up, you may qualify to borrow more–something homeowners are doing at a brisk pace. Originations of home equity lines of credit (HELOCs) in the first-quarter 2018 were up 14 percent from a year earlier, and 18 percent from the fourth-quarter of 2017, according to Attom Data Solutions, a real estate data company.

Borrowing based on the equity in your home is a relatively inexpensive way to finance a home improvement project. According to Bankrate, interest rates on floating-rate HELOCs currently average around 6 percent—comparable to the best personal-loan rates offered by national personal-loan lenders like Lending Tree and SoFi.

HELOCs have other advantages over personal loans. Unlike personal loans, HELOCs let you borrow small amounts over time, which can help keep your interest payments lower than if you take out a large sum all at once. They also offer longer repayment periods (30 years versus 10 years), which means you could pay less per month (though you could also end up paying more total interest over time).

And a HELOC can be far less costly than using a credit card to pay for a home improvement project. Credit card interest rates are typically in the double digits. 

More on Real Estate

But be careful about how much you borrow. Many homeowners who refinanced or took out large home equity lines leading up to the Great Recession ended up owing more than their homes were worth when prices plummeted, says Keith Gumbinger, vice president at HSH, a mortgage data provider. While most economists don't see the same debacle on the horizon, history serves as a warning.  

"It can take many years to build equity in your home but only a few purchases or a small decline in value to wipe it all out," notes Gumbinger.

Also, be wary of borrowing off your home with a reverse mortgage, an option for homeowners age 62 or older. If after borrowing you can't afford the insurance, taxes, maintenance or monthly debt payments, you could lose your home.

What you can do. Shop for home equity products through loan aggregators like HSH and Bankrate. Check out local and national credit unions, which often offer very competitive rates in return for a minimal membership fee. Make sure you've accounted for all fees—closing costs, annual maintenance fees, for instance—as well as terms and limitations. A fixed-interest, home equity loan with a lower annual percentage rate (APR) still may not be as affordable as a HELOC if you only are given a few years to pay it back. The Consumer Financial Protection Bureau has more information on what to know before you borrow.

Keep in mind that the Federal Reserve has signaled that it will raise the short-term interest rate, on which HELOC interest is based, twice more in 2018. And under the new federal tax law, you can deduct interest on home equity debt only if it's used to buy, build, or improve upon your home—not for purposes like paying college tuition or medical bills.

You Might Need More Insurance

The portion of your homeowners insurance that covers dwelling and outbuildings isn't tied to your home's market value. It's related to the cost of rebuilding. In theory, your insurer is keeping tabs on that and raising your premiums accordingly. (Consumer Reports recommends buying insurance that automatically raises your coverage to respond to home-building inflation and the costs of complying with building-code updates.) Bottom line: You don't need to automatically raise the coverage for damage to your home just because your home's value has risen.

However, as your home equity rises, so does your net worth. So you might need additional coverage in case someone sues you for, say, an injury on your property.

What you can do. Buy umbrella liability coverage or, if you already have such a policy, increase the coverage, says Michael Barry, a spokesperson for the Insurance Information Institute, an industry trade group. For just a few hundred dollars you can buy a policy offering $1 million in coverage above what you already have on your homeowners policy.

You Might Pay More Property Taxes

In most places in the United States, higher home values can lead to higher property taxes. That can cause a financial squeeze if your income doesn't rise as well. 

What you can do. If you think your property taxes are too high, you can appeal to your municipality. In most cases, you'll need to present your local taxing authority with a new appraisal, done either by you or by a professional. It has to show that the tax increase isn't warranted based on how other, comparable homes in the area are selling. Typically, municipalities offer an open time window once a year for those appeals.

That gambit probably won't work, though, if the values of the homes around you are rising at the same rate as yours. So look into other tax breaks your state or municipality may offer for certain populations. In Texas, for instance, disabled people, veterans, and those age 65 and older get special exemptions from property taxes, including school taxes; for older disabled veterans, the exemption is up to $12,000. In New York, some towns and villages offer volunteer firefighters and ambulance workers exemptions of up to $500 off their property taxes. 

You Could Be Tempted to Spend More

Perhaps the greatest overall risk is what economists call the "wealth effect"—the perception that you're richer. If that prompts you to spend more without the cash flow to back it up, you could be headed for trouble. 

"It can create a false sense of security," notes Justin McCarthy, managing partner, Mariner Wealth Advisors, based in New York City.

A higher home value—and net worth—could help you to meet financial goals, especially if you are counting on a home sale or planning to borrow money, says McCarthy. But don't make spending decisions based on your home's value alone. You also need to consider other financial assets, including your income and your retirement savings.

What you can do. Don't change your day-to-day spending habits. If your home's higher value prompts you to consider selling or taking out equity, talk to a financial adviser to determine your options. She can analyze your financial assets—your home, investments, expected Social Security and pension benefits, and earned income—and devise a plan to help you reach your goals. 

McCarthy says he and his colleagues take a conservative view toward home values when they plan for clients, since in many cases homeowners plan to stay put and may never have the benefit of living off the profits from a home sale. 

Consumer Reports recommends finding a financial adviser who promises to be your fiduciary, which means acting in your best interests at all times. Certified financial planners and registered investment advisers are among the professionals who take such a fiduciary pledge. You can find planners who are fiduciaries and charge by the hour or for a flat fee at Garrett Planning Network. Several financial advisory companies, such as Personal Capital, Betterment Premium, and Vanguard Personal Advisor Services also offer advice for a reasonable fee.