If you own a home, you’re probably aware—the COVID-19 pandemic has fueled a staggering increase in home prices. In fact, did you know that U.S. homeowners are sitting on approximately $23 trillion worth of home equity after gaining $2.7 trillion in equity this year?
How Did This Happen?
In short, home equity is the current market value of your home minus what you still owe. There are many different ways to access and benefit from equity. The gains this year follow a bond-buying program created to support the economy during the coronavirus pandemic. The program pushed mortgage rates down, which led to less expensive financing. With less expensive financing, borrowers are able to qualify for bigger mortgages.
How Does This Impact Me?
The government is preparing to taper its bond-buying program and mortgage rates are beginning to creep back up. With home prices still surging at a rate last seen more than four decades ago, however, you may have more equity in your home than you thought. Here are a few easy ways to use your equity to your advantage.
Cash-out Refinance
Home prices in 2021 increased 17 percent from a year earlier, according to a forecast from Fannie Mae. While the pace will likely slow in the year to come, the impact has affected and will likely continue to affect more than just the homes on the market.
Cash-out refinances—news loans that resulted in a lump-sum payout to a homeowner – were up 33% in late 2021 when compared to a year earlier.
With a cash-out refinance, borrowers obtain a new loan amount that is higher than the amount they owe on their home; at closing, they pocket the difference between their new loan amount and their current loan balance.
Traditionally, it’s been said that refinancing is beneficial if you can reduce your rate by at least 2%. However, some lenders say that even a 1% savings is a great enough incentive to consider refinancing your home. To see if you qualify for a cash-out refinance, complete an online application here, or reference these resources:
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- What should I know about debt-to-income ratio?
- How can I be more consistent with my payments?
Home Equity Line of Credit (HELOC)
If you want to access cash for emergencies or for a one-time planned expense, you may want to use the equity that you have earned to obtain a HELOC loan. HELOCs are secured against the value of your home equity and act as a revolving source of funds.
If you qualify, the lender will provide the total amount in one lump sum check or as a direct deposit. After that, you’ll have two monthly mortgage payments on the home for 10-15 years, on average. The majority of HELOC products use a formula to arrive at the highest amount someone can borrow. A typical amount runs upwards of 80 percent of the home’s appraised value, after deducting your existing mortgage.
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Convert Home Equity into Retirement Savings
Homeowners 62 years and older may want to convert their home equity into money for retirement. Home Equity Conversion Mortgages (HECMs) permit eligible borrowers to take advantage of the equity they’ve built up over the years and turn it into funds to pay for living expenses, medical bills, or home projects.
Unlike a typical mortgage, where you make regular payments to a lender, a reverse mortgage doesn’t require monthly payments; instead, the equity is converted into cash which may be received monthly or in a lump sum.
What Else Should I Know?
Equity can also be useful if you need to move in a hurry. With a cross-collateral loan, you can use the equity in your existing home as a down payment on a new property. In a competitive real estate market, cross-collateral loans are a helpful tool to help get you into your dream house and either sell or rent out your old home.
Ready to invest in your future? Home equity is a fantastic way to build toward your long-term financial success. Call Tim today to take a confident next step in your homebuying journey.
