Housing Prices have risen dramatically over the past few years and continue to increase across the country.
During the pandemic, millions fled major cities to find more extensive and comfier spaces to work from home in the suburbs, raising demand and driving up costs. Meanwhile, material shortages worldwide continue to raise new home construction costs. The housing market’s low supply coupled with cash-wielding house hunters continues to squeeze an already tight market even further, and experts predict this trend will continue well into the rest of 2022.
This same scenario is excellent news for a homeowner’s equity. Over the past several years, people in the industry have discovered that the real estate gold rush is on. Home values have increased dramatically, helping homeowners gain over $55,000 in equity in less than a year, all between the fourth quarters of 2020 and 2021.
Overall, $3.2 trillion in total equity was added across the country during the same period, with a 29% increase year over year, according to CoreLogic, a real estate data analytics firm. While many homeowners have plenty of equity, it’s locked until they sell their home, use their equity through a cash-out refinance, or obtain a home equity financial product such as a HELOC or home equity loan.
Your home is most certainly one of your most valuable assets, and as with other assets, you can profit from your house’s value in various ways. The cash-out refinance, HELOC, and a home equity loan are three popular methods for withdrawing equity from your property without selling it. These investment products allow you to access your home’s equity for various uses, such as remodeling your house or funding your children’s education. However, if you sell your property, you’ll have to repay it over time or in one lump sum. So, before you decide what to do, consult with a home equity professional about the benefits and drawbacks of each choice.
Maximize Your Home Equity:
Here are some of the most popular ways to access your house’s worth while it is still increasing in value.
Cash-Out Refinance
A cash-out refinance is a mortgage loan that helps you access the equity in your home. With this type of loan, you replace your current mortgage with a new one and receive the difference in cash. The main advantage of a cash-out refinance is that it usually has lower interest rates than other types of loans, such as home equity loans. Additionally, it allows you to borrow more money than a home equity loan. A few drawbacks of cashing out include:
Risk of foreclosure: If you cannot repay your loan, you could lose your home. Unsecured loans are far less risky.
Closing costs: Mortgage loans demand high up-front closing costs, which must be paid no matter what, whether you roll them into your loan balance, write a check, or take a higher rate. To close your loan, you’ll spend between several hundred and several thousand dollars, and you need to add that amount to the costs of wherever you’re spending the money.
HELOC
A home equity line of credit, or HELOC, is a loan that allows you to borrow against the equity in your home. With a HELOC loan, you can withdraw money as needed up to the limit of your credit line. The advantage of a HELOC loan is that it usually has lower interest rates than other types of loans and allows you to borrow money over time. One disadvantage of HELOCs often stems from a borrower’s lack of discipline. Because HELOCs let you make interest-only payments during the draw period, it’s easy to access cash impulsively without considering the potential financial ramifications. Another thing to consider is that the interest on a HELOC is not tax deductible.
Home Equity Loan
A home equity loan is a type of loan that allows you to borrow against the equity in your home. However, you receive the money in one lump sum. In addition to offering a stable interest rate, home equity loans are secured by your property, and they typically offer a lower rate than unsecured forms of borrowing such as personal loans or credit cards. The disadvantage is that you could lose your home because it’s being used as collateral for the loan. Furthermore, you’re responsible for the loan balance if you sell your home. Since the loan is tied to your home, you must pay off the loan if you choose to sell it.
As you can see, there are several ways to access your home equity without selling your home. Each option has advantages and disadvantages, so it’s essential to consult a home equity professional to determine which loan suits your circumstances. With home values on the rise, now is a great time to tap into that equity. By doing so, you can use the money for home improvements, debt consolidation, or other financial needs.
Important Factors To Consider
Even if you think your home’s equity is a good alternative for funding your house’s makeover or lowering your debt, there are certain factors to consider before doing so.
Your home’s value can decline.
Keep in mind that there’s no assurance that your property’s value will rise dramatically over time. Your home may even depreciate in an economic slump or be damaged by fire or extreme weather. If you borrow money on a HELOC or take out a home equity loan and the value of your house decreases, you may end up owing more on the loan than what your house is worth. You are said to be “underwater” on your mortgage when this happens.
Say, for example, that you have a mortgage worth $300,000, but the housing market in your area has collapsed, leaving your property’s market value at only $200,000. Your mortgage would be $100,000 greater than the real estate. Getting accepted for debt consolidation or a new loan with better terms is considerably more difficult if your mortgage is underwater.
There’s a limit on the loan’s amount.
You can only borrow up to 80% – 85% percent of the value of your house with a HELOC or home equity loan, minus any existing mortgage debt. Even if you have $300,000 in equity, most lenders will not allow you to borrow that much. Your loan-to-value ratio or LTV determines the amount you may borrow, and that number varies from person to person. It’s tied closely to one’s credit score, financial history, and current income.
How not to use your home equity.
A common reason to tap into home equity is for non-essential personal expenses such as an extravagant vacation or a luxury car that is not in line with your budget. While spending money on something other than house payments may be appealing, creating a savings plan to cover these entertaining expenses is the best way to go. A good rule of thumb is not to borrow more than you need, don’t overspend, and not put your house at risk of foreclosure for a frivolous home equity purchase.
Even if you use your home equity to add value to your house or improve your financial position in some other way, keep in mind that if you don’t repay a home equity loan or HELOC, you risk losing your house. Run the numbers and ensure you can continue paying your mortgages while using home equity money.
Do you have any questions about how to access your home equity? Leave a comment below or contact us for a free consultation.