Take your home equity and run

Thursday February 8, 6:00 am ET

 

If you live in a high-cost metropolitan area, the equity in your current home can buy a heightened lifestyle somewhere else. While in certain parts of the country home prices have leveled off or headed south, housing price disparities in different regions mean that some people have more equity than others by virtue of their locations. 

 

 Extra equity is an added benefit to the American dream. You can manage this equity in one of several ways. You can sit on it and hope that the real estate market in your area doesn't tank. You can tap your equity and use it -- generally not a good strategy since you have to pay it back. Or you can cash it out and move to an area where the housing dollar buys more for the buck.

 

If you purchased property in a lofty market such as California or any of the regions in the Northeast, Southeast or Southwest that experienced strong appreciation, you might still be sitting on equity in excess of $100,000. Particularly if you're working too hard to make the mortgage payment each month or if you just want more space -- whether indoors or outdoors -- an out-of-state move may be a solution. "This is a wonderful strategy," says Sandy Abalos, CPA and managing partner at Abalos and Associates, a CPA firm in Phoenix. Several of her clients have done this recently with success.

 

Housing prices all over the map

 

The National Association of Realtors reported stark contrasts among several regions of the country in its third-quarter 2006 median existing-home prices. 2006 3rd-quarter median existing-home prices

 

Midwest: $170,500

South: $187,300

Northeast: $276,000

West: $349,000

 

Other areas of the country run higher and lower. In San Francisco, for example, the median home price is a whopping $749,400, and in Bridgeport, Conn., it's $466,600. Meanwhile, median prices are approaching the $120,000 range in Charleston, W.Va.; the $150,000 range in Champaign-Urbana, Ill., and $140,000 in Columbia, S.C. In certain parts of the country, you can still find homes well below $100,000 -- for instance, in Decatur, Ill., Youngstown, Ohio, and Elmira, N.Y.

 

A math equation in your favor

In White Plains, N.Y., the median price of a home was $558,600 in the third quarter of 2006, up from $387,300 in 2003. If someone had purchased a home there in 2003 and sold in the fall of 2006, the cashed-out equity would have totaled $171,300.

 

The seller's options: Pay cash for another house or upgrade to a larger one for the same price or less. "You can take the difference and live nicely in another part of the country," says Certified Financial Planner Doug Thorburn of Northridge, Calif. Recently, the "Walters," a family of five in San Bernardino County, Calif., sold their 2,400 square foot home for $550,000. They had purchased the house in 2003 for $322,000. With the $228,000 profit, the Walters paid cash for another home of the same size in rural Georgia. They used leftover funds to pay off a vehicle loan and credit card debt.

 

The Walters are now debt-free and their new home sits on 15 acres -- a lot more space than the small lot they owned in California -- for a fraction of the cost. Gina Grzelka and her husband sold a two-bedroom 1,350 square-foot house in the suburbs of Chicago and now live in a four-bedroom 3,000 square-foot house in Baldwinsville, N.Y. The price of their spacious new home was half the selling price of their Chicago area home. In Sanford, Fla., Jan Zeiger and her husband are in the process of selling their home for $260,000. They plan to move to Columbia, S.C., where they hope to find a bigger, newer home for less than $175,000.

 

Laura Markel sold her 700 square-foot condo in San Clemente, Calif., for $300,000 after paying only $105,000 for it four years earlier. With $180,000 of her equity, she purchased a 1,700 square-foot, three-bedroom house in Prescott Valley, Ariz. She now has a private backyard, which she did not have in San Clemente.

 

What's in it for the IRS? Not much! Only a small percentage of the population is taxed on the profits from the sale of a house that they had occupied, thanks to generous provisions that allow single homeowners to exclude up to $250,000 of capital gains on the sale of a home ($500,000 for married couples filing jointly). The tax law, which went into effect in 1997, applies to sellers who live in a home as a principal residence for two of the five years prior to its sale.

 

Salaries vs. cost of living expenses

It's true that salaries are usually higher than the national average in demographic areas with high living expenses.

For example, the latest income report published by the U.S. Census Bureau states that the median income in Colorado was $51,518 in 2004-2005. In Denver, the median sales price of an existing single family home averaged $253,200. However, in Arkansas, the median salary was only $36,406 and a house in Little Rock averaged $128,900.

 

The ratio between housing and the cost of living is not consistent everywhere. "Before assuming that the cost of living and salary differentials have a parallel relationship, spend a little time doing some research," says Barry L. Brown, president of Effective Resources in Holiday, Fla. For instance, he notes, salaries run about the same in Tampa, Fla., as in Nashville, Tenn. "However, the cost of living in Nashville for the same salary level is 92.8 percent that of Tampa, Fla.," he says. Supply and demand may be what drives salaries, but not necessarily the cost of living. Check out Bankrate's cost of living calculator to compare the costs of various professional services and products in your home town versus those in other cities.

 

Improve your portfolio, your lifestyle -- or both

Housing costs are the biggest expense for most families in the U.S. "For people who are not ultrawealthy, it's their biggest investment and piece of debt," says CPA Randy Harrison, a partner at Meyers, Harrison & Pia in New Haven, Conn. "By relocating into a lower-cost market, they are able to reduce the carrying cost of that debt, such as the interest expense on the mortgage." Once a big chunk of your salary is no longer targeted toward your mortgage, you may wonder what to do with the extra money each month. "By freeing up that cash flow you are able to use the additional cash that is available to invest for future growth or to increase lifestyle," says Harrison.

 

Paying off debt after the sale of your home is one of the best things you can do to improve your financial situation. "Pay off the unsecured debt with the highest interest rate first, says Deborah Pegues, CPA and author of "30 Days to Taming Your Finances: What to Do (and Not Do) to Better Manage Your Money." If you can't pay off everything at once, pay off the debt with the lowest balance first for a snowball effect, says Pegues. "You will feel a sense of success after paying off a debt and will want to do it again." To successfully pay off debt, you will have to make some changes. "I don't believe in total deprivation, but you have to give up a luxury," says Pegues. A low or nonexistent mortgage also provides lifestyle benefits such as the ability to pursue a hobby, travel or simply the luxury of working less and playing more. Two-income families with children may consider having one parent stay at home.

 

However, if mortgage interest was your largest itemized deduction, losing or decreasing it may have some consequences. "If you replaced your home with a less-expensive residence, the good news may be a lower interest charge on your mortgage," says CPA Dan Meehan, a partner in J.H. Cohn's Tax Advisory Services Group. "But remember, the government could have been subsidizing about one-third of that payment with the benefit of a tax deduction.

 

"A lower mortgage means higher taxable income, so adjust your withholding or estimated payments to make up the difference and avoid underpayment penalties," he says.

 

Welcome to the neighborhood

Relocation is not something to take lightly, especially if several people are involved in the decision. The quality of schools in a prospective area is an important factor to consider when children reside in the home. Health care accessibility is another important issue. Vicki Gagnier, a relocation specialist, says there are five critical components a family should evaluate when contemplating a move to a new place.

 

5 most critical components:

 

Cost of living analysis.

Education availability.

Employment opportunities.

Quality of life.

Religious and civic affiliations.

 

"A reputable relocation company will typically provide as a service, at no expense to the transferring family, a relocation package that includes information on demographics, schools, cost of living, recreational, cultural, civic and business opportunities," says Gagnier. Homeownership will always be the American dream, but being a slave to a mortgage can be a nightmare. If you are struggling with high mortgage payments or have the desire for a lifestyle change, do the math and determine the equity you have in your home. The calculation may spur a quest to find a new place to call home.