Is it time to cash out?

By Dana Dratch • Bankrate.com

If your house has been going up, up, up in value, might it be a good time to sell -- before it starts going down, down, down?

In most cases, no.

"Housing prices are going to do what they're going to do," says Eric Tyson, author of "Mind Over Money: Your Path to Wealth and Happiness."

"It doesn't matter. It shouldn't make or break your ability to do things, unless you were counting on that equity to do something. It's really a paper thing."

Ric Edelman, a financial planner and author of "The Truth About Money," agrees. "A bubble is irrelevant unless you're selling," he says. "If you can make the monthly payment, who cares what the house is worth?"

He compares the situation to owning a car, which almost always goes down in value. But you don't buy it as an investment. Instead, you keep it "because you can afford it, and it's serving," he says.

Unlike other investments, your house is more than just a place to let your money grow. It's also the place you call home. So unless a dip in value would really hurt your bottom line, or you're planning on moving soon anyway, it's usually smart to hang on to the house and ride it out.

Time to cash out?

1. Are you happy where you are?
Do you like the house? The neighborhood? The neighbors? The school system and local amenities? Is the house big enough (or small enough) to be comfortable now and in a few years? Does it have the features you need or think you might need? If not, are you leaning toward moving or renovating?

The problem with trying to time the real estate market and sell before a bubble bursts is you're trying to predict the future. You're gambling your present home and happiness for a lot of unknowns. Will a price dip actually happen? Will it be steep and sudden or a gradual softening? Short-term or sustained?

Trying to play the market is like trying to time a roulette wheel, says Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University. And just about as practical.

Cashing out, "is something you associate with speculators, not the person who buys a home to live there," says Jack Guttentag, professor emeritus of finance at the Wharton School and author of "The Mortgage Encyclopedia."

While you always have the option of selling because prices might be going down, not many people do, says Dick Peach, vice president of the Federal Reserve Bank of New York. And there are good reasons for that, he says.

"As a rule, most people don't buy a house as a short-term proposition," says Peach. Because this is more than an investment, it's a lifestyle choice, "people don't take buying and selling lightly," he says. "Because of that, it's pretty impractical to try and time the peaks and troughs in home prices."

When values dip, many "believe that the period of negative equity will be short," he says. "And the cost of moving is high. So they continue to make the payments and hope for the best -- which I think is the rational thing to do."

You might also want to take the long-range view. "Over the long term, home prices fairly steadily tend to go up -- about 3 to 5 percent a year," says Retsinas. "It's not tech stock. But over the long term it turned out to be a pretty good way to build assets.

Bottom line: If your house feels like home and you can afford it, why move?

2. Are you already planning a move?
One of the times it might make sense to try to get out before prices go down is if you're already planning a move.

"Suppose you're in a market that has some of the characteristics of a bubble, and you are otherwise thinking of relocating or making a lifestyle change," says Tyson. Then it's "certainly a good time -- when there are inflated prices in some of those markets -- to think about cashing in your chips."

"The secret to cashing out equity is to move from a high-cost market to a low-cost market," says Retsinas. But only if you were planning it anyway, independent of equity issues.

Or, if cashing out your equity and downsizing was always part of your long-range financial plan, an impending bubble could be your signal to investigate starting the process a little early.

And include the transaction costs when you run the numbers. "Selling and buying back can gobble a large percentage," which means they have to be expecting a major market correction, says Tyson. Selling "really makes more sense for people who have other reasons to think about selling, like relocating or downsizing."

3. Do you have a manageable mortgage?
Can you afford your mortgage payments? If you're barely making it now and might have trouble if rates went up, you might simply want to refinance to a fixed rate. You may also want to rethink your mortgage if you've got an interest-only or reverse-amortization loan.

Your ability to ride out a bursting bubble or a bad economy "has to do with the mortgage product you're carrying," says Retsinas. "With a fixed-rate mortgage, you have some insulation from interest rate increases."

And if you were already planning to sell and move to a smaller home or a less expensive area in the next few years, and you really want or need that equity, then getting out before values drop could be a smart move.

4. How stable is your income?
When it comes to making that monthly payment, your mortgage is only one-half of the equation. You also want to look at your income and job stability. If you work for the only plant in town, and you suspect it might close, that's important to consider.

If you had to trade jobs, would you have to move? How likely is it you could change jobs or be transferred?

Does the family have one or two incomes? What are your options if something happens to some or all of the income?

5. How much equity do you have?
Equity provides a cushion if your home goes down in value. If you bought at $200,000, you've been living in it for a number of years, and it's now worth $300,000 on paper, you've got a little breathing room.

If you bought when market prices were the highest, leveraged every cent to get into the house, have only been there a short time, and prices are headed south, then you're much more vulnerable. If you have to sell, you may not get what you owe.

Any time you have less than 10 percent to 15 percent equity in your home, "you're a little at risk," says Ilyce Glink, author of "50 Simple Steps You Can Take to Sell Your Home Faster and For More Money in Any Market."

"With the cost of a sale, transfer tax, moving expenses, borrowing 90 percent could mean you end up walking away with nothing in your pocket."

But if your equity level is closer to 15 percent to 20 percent, "you still have a little bit of cushion," she says.

Even if you're a new homeowner, you don't have to panic.

"There's not a lot you can do," says Guttentag. "You can't prevent the decline in your equity. So as long as you have the capacity to keep making the payments, you're OK."

6. What's happening in the local economy?
When talk turns to housing bubbles, remember: We don't live in one big homogenous area, but many little communities.

"It's very uneven," says Retsinas. "Nationally, home prices nominally haven't fallen in 50 years. That doesn't mean they won't fall in a particular area. Don't be swayed by the national number. Look at what's happening in your area."

Analyze the neighborhood market, says Glink. Are houses taking longer to sell? Are sellers getting more than they paid? "That's key," she says. "One other thing to ask: How long am I going to stay here?

7. Do you live in the house?
Is this is a second, third or ninth house that you bought as an investment or your primary residence? While most people make a healthy profit when they sell if they stay in the home after a couple of years, practically speaking that should take a back seat to having a good place for you and your family to live.

An investment home is a totally different proposition. This time, you want to look strictly at the dollars and cents. Can you afford to make the loan payments if rates increase? Do you have fixed-rate financing or will you have to try to predict how rate increases could affect your payments?

How long have you had the house? Can you make the payments comfortably or are you stretched to the max? Were you able to get a conventional loan or a product that could leave you vulnerable if the value of the property decreases? Do you have a lot of equity to act as a cushion against possible decreases in value? Can you afford to keep making payments if the house stands empty for a few months or if a tenant gets behind on rent?

"Investor-prospectors are the ones that will be more susceptible to a drop," says Retsinas.

Guttentag agrees that devaluated home prices could be a real problem for speculators, especially if they are financing a large portion of the purchase price with an adjustable-rate mortgage or an interest-only loan and counting on turning the property fairly quickly. "They're the ones who are going to get hurt, and the lenders who financed them are going to be hurt," he says.

You also want to look at the reason behind any potential or perceived value drop. If fewer people are buying homes in your area, and you can rent your property at a good price, your home may never sit vacant. But if your area is becoming a ghost town because jobs are leaving the area, that could mean you need to sell.

And the more houses you have, the more complicated it can get. "The more leveraged you are, the worse your position," says Mike Schenk, vice president of economics and statistics for the Credit Union National Association.

Are you banking on making money from equity or rent? And if the numbers no longer work, what's your exit strategy?

Someone buying a home "primarily for investment purposes in 2006 may be disappointed," says Retsinas. "But if you're living there, you can probably ride out the cycle. The dividend is the bed you sleep in at night."

Dana Dratch is a freelance writer based in Atlanta.