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Rising home prices do not
guarantee wild riches

Most people agree that home ownership is a good thing. But is a home really an "investment?" In a way, it is. But keep this in mind: Your home, by itself, is almost certainly not the type of investment that's going to help you meet your long-term goals, such as a comfortable retirement.

Many people think that because they put so much money into their homes, they are bound to be handsomely rewarded in the future. And it is true that, over a long period of time, home prices generally rise. But this appreciation has not come close to that of some financial assets, such as stocks. Stock prices will certainly fluctuate in the short term, but housing prices can do the same. In some parts of the country, home values have fallen for several years in a row before recovering. (Keep in mind, though, that past performance does not assure future results. Stocks are subject to risks, including the potential loss of principal invested.)

Still, if you live in a house for many years, the chances are pretty good that you will end up making a profit when you sell. And if you've owned and lived in your home for at least two years within the five years preceding its sale, you can exclude up to $250,000 in capital gains, or $500,000 if you're married and filing a joint return.

Of course, after you sell your home, you'll have to live somewhere, so some of your profit will need to go toward a new residence. But if you "downsize," you could end up with a nice sum of money. Will it be enough to finance your retirement, help pay for your children's (or grandchildren's) college education and meet whatever other goals you have? Probably not. And that's why you'll still need to build a diversified portfolio containing high-quality stocks, bonds and other securities.

Even if you can't count on your home meeting all your long-term financial goals, you can use the equity in your home to help boost your cash flow. Consequently, you may be able to avoid tapping into your long-term investments, so you can continue making progress toward your important objectives.

Here are two of the most common ways to get money out of your home:

» Home-equity loan -- You can generally get this type of loan at a competitive rate, and the interest may be tax-deductible. (To make sure of the tax deductibility, though, you'll want to consult with your tax adviser.) You can use the loan for virtually any purpose you choose, but keep in mind that you're pledging your house as collateral -- so you have to be sure you can afford the loan payments.

» Reverse mortgage -- If you've paid off your home, you might want to think about taking out a reverse mortgage. This is a special kind of loan that enables you to convert your home equity into cash, either through a line of credit or installment payments. Essentially, you're selling back part ownership of your home to your lender. Reverse mortgage programs are not suitable for everyone, however, so make sure you know what's involved before you sign on the dotted line.

Through careful planning, you can incorporate your home into your overall financial and investment strategies. So, use this asset wisely -- it can pay off for you in a variety of ways.