How to unlock equity in your home

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The good news, homeowners, might be the perfect time to unlock equity in your home.

Home values ​​have skyrocketed since the start of the pandemic. The national median price of existing homes hit a record high of $ 363,300 in June, from $ 294,400 a year ago, according to the National Association of Realtors. As a result, the average American homeowner now has $ 153,000 in workable equity, according to a May report from mortgage data firm Black Knight.

“US homeowners already had record levels of exploitable equity before Covid-19, and the boom we’ve seen in home prices over the past year has further increased those levels,” said Andy Walden, vice-president. President of Black Knight Market. research.

Collectively, U.S. homeowners have seen their equity explode by a total of nearly $ 1.9 trillion from the first quarter of 2020 to the first quarter of this year, according to CoreLogic’s quarterly Homeowner Equity Insights report. This created an opportunity for home owners to get their hands on a quick injection of cash, said Guy Cecala, the managing director and editor of the trade publication Inside Mortgage Finance.

There are three ways to use your capital. Here’s what you need to know about each option before you cash out.

With a cash refinance, you take out a new mortgage – most lenders will only grant up to 80% of your home’s value – for more than what you owe on your current mortgage and pocket the difference between the two. cash loans. For example, let’s say you own a $ 400,000 house and you still owe $ 100,000 on your mortgage. If you get approval for a new loan of $ 150,000, you will get $ 50,000 in cash, less the costs of closing your new mortgage. (Closing costs typically range between 2% and 5% of your loan amount, but they can vary by lender, so it pays to shop around.)

Given today’s low mortgage rates – the average rate on a 30-year mortgage fell to a windfall of 2.78% in the week ending July 22, according to the Weekly Mortgage Survey Freddie Mac Primary – A cash refinance is “a good deal right now,” said Heather McRae, senior loan officer at Chicago Financial Services.

“Cash refinancing is such a cheap way to borrow money right now,” Cecala said. “The only time you don’t want to do a refi withdrawal is if you’re going to get a higher mortgage rate than what you’re currently paying, as that will increase your monthly mortgage payment,” he added.

A Home Equity Line of Credit, or “HELOC,” is just as it sounds: it’s a line of credit that allows you to borrow money on your home. Like a credit card, you have a fixed limit on how much you can spend at any given time – typically, you can borrow up to 85% of the value of your home. One of the benefits of a HELOC, Ms. McRae said, is that you only pay interest on the money you borrow. This is a great feature if you don’t know how much money you will need, for example if you are planning to make some improvements to your home that can fluctuate in costs depending on the availability of building materials.

The main drawback? A HELOC has a variable interest rate – rates currently range from 3.50% to 8.63% depending on your credit score, according to ValuePenguin, a financial research firm. This means that the interest rate on your line of credit may increase if the Federal Reserve increases the Federal Funds rate, which is currently set in a range of 0% to 0.25%.

If you’re looking for a regular monthly payment, Ms. McRae recommends a home equity loan, with a fixed interest rate. With a home equity loan, you receive a lump sum in cash and pay off the loan in installments over a set period of five to 30 years.

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

But, there are a few drawbacks: Home equity loan interest rates are generally higher than HELOC rates, at least when you open a HELOC for the first time; most lenders allow you to borrow only up to 80% of the value of your home; and you are now on the hook for two mortgages.

Whether you are considering a cash refinance, home equity line of credit, or home equity loan, experts recommend evaluating how you plan to spend the money before unlocking the equity in your home. “There are good and bad ways to spend your equity,” Ms. McRae said. “Are you going to use the funds to make improvements to your home that will increase the value of your home?” Are you going to pay off high interest debt? Or will you use the money to take a trip to Tahiti? “

“I recommend speaking to a financial advisor to discuss how you plan to spend the funds before you tap the equity in your home,” Ms. McRae added.

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