Home Improvement

Easy methods to unlock the fairness in your house

Good news, homeowners, now might be a good time to free up your home equity.

Housing values ​​have soared since the beginning of the pandemic. According to the National Association of Realtors, the national median price for existing homes hit a record high of $ 363,300 in June, down from $ 294,400 a year ago. As a result, the average U.S. homeowner has $ 153,000 in tangible equity, according to a May report by mortgage data firm Black Knight.

“American homeowners had record levels of available equity prior to Covid-19, and the house price boom last year only increased those levels,” said Andy Walden, vice president of market for Black Knight Research.

Taken together, U.S. homeowners skyrocketed their equity by nearly $ 1.9 trillion in total from Q1 2020 to Q1 this year, according to CoreLogic’s quarterly Homeowner Equity Insights report. This is an opportunity for homeowners to get their hands on a quick injection of cash, said Guy Cecala, the Managing Director and Editor of Inside Mortgage Finance.

There are three ways that you can use your equity. Here’s what you need to know about each option before making a withdrawal.

With a cash-out refinance, you take out a new mortgage – most lenders only allow up to 80 percent of the value of your home – for more than you owe on your current mortgage and pocket the difference between the two loans in cash . For example, let’s say you own a home worth $ 400,000 and you still owe $ 100,000 on your mortgage. If you are approved for a new loan of $ 150,000, you will receive $ 50,000 in cash, minus the closing costs of your new mortgage. (Closing costs are typically between 2 and 5 percent of your loan amount, but can vary depending on the lender, so it’s worth looking around.)

Given today’s low mortgage rates – the average rate on a 30-year mortgage fell to a bargain 2.78 percent for the week ending July 22, according to Freddie Mac’s weekly Primary Mortgage Survey – a payout refinance “is on the horizon for now Bargain, ”said Heather McRae, senior loan officer at Chicago Financial Services.

“Cash-out refinancing is such an inexpensive way to borrow money right now,” said Cecala. “The only time you don’t want to do a cash out refi is when you get a higher mortgage rate than what you are currently paying because it increases your monthly mortgage payment,” he added.

A home equity line of credit, or “HELOC,” is exactly what it sounds like: it’s a line of credit that allows you to borrow money for your home. Like a credit card, you have a set limit on how much you can spend at any given time – you can typically borrow up to 85 percent of the value of your home. One of the advantages of a HELOC, Ms. McRae said, is that you only pay interest on the money you borrow. This is a nice feature when you are unsure of how much money you need, e.g. B. If you are planning some home improvements where the cost may vary depending on the availability of building materials.

The main disadvantage? A HELOC has a floating rate – interest rates currently range from 3.50 percent to 8.63 percent, depending on your creditworthiness, according to ValuePenguin, a financial research firm. That means the interest rate on your line of credit may increase if the Federal Reserve raises the base rate, which is currently set at a range of 0 to 0.25 percent.

If you are looking for a constant monthly payment, Ms. McRae recommends a fixed rate home loan. With a home equity loan, you receive a lump sum in cash and repay the loan in installments over a set period of five to 30 years.

Because you get the money up front, “a home loan is for someone who knows exactly how much money to borrow,” said Jon Giles, director of home equity lending at TD Bank.

There are some drawbacks, however: home loan interest rates are usually higher than HELOC rates, at least if this is your first time starting a HELOC; Most lenders only allow you to borrow up to 80 percent of the value of your home; and you’re now hooked on two mortgages.

Whether you’re looking for a payoff refinance, home equity line of credit, or home equity loan, experts recommend researching how you plan to spend the money before unlocking your home equity. “There are good and bad ways to spend your equity,” said Ms. McRae. “Will you use the funds to make home improvements that will add value to your home? Do you want to pay off high-interest debts? Or will you use the money for a trip to Tahiti? “

“I recommend speaking to a financial advisor to discuss how you would like to spend the funds before tapping into your home equity,” added Ms. McRae.

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