How to cash in your record-breaking home equity

Home equity hits new high

There has never been a happier time to own a home.

The surge in real estate values ​​last year led to the largest amount of equity on record. The average owner was sitting on $ 178,000 in “workable” equity at the end of the third quarter, according to Black Knight data and analytics provider.

With access to increased equity, you can pay off other debt, invest, or make renovations. Which begs the question, how do you derive equity from your home and should you do it?

Check your eligibility for withdrawal. Start here (December 7, 2021)

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What does it mean to have home equity?

The equity in your property is the equivalent of the cash value accumulated in your property. Equity increases each year as you pay off your mortgage and the value of your home increases.

Equity must first be converted into cash to be spent. Most homeowners do this through cash refinancing, while some go for a second mortgage.

“Growth in house prices in the third quarter added more than $ 250 billion to Americans’ already record levels of exploitable equity,” Ben Graboske, president of data and analytics at Black Knight, said in the report. .

“The aggregate total of $ 9.4 trillion is an astonishing 32% increase over the same period last year and almost 90% more than the pre-Great Recession peak in 2006.”

Check your eligibility for withdrawal. Start here (December 7, 2021)

How to measure the equity in your home

All you need to figure out your total equity is the current value of your home and subtract your mortgage balance.

For example, if your house is worth $ 275,000 and your loan balance is $ 150,000, then you have $ 125,000 in equity.

Getting an up-to-date estimate of your property’s value requires a little research of comparable home sales in your area, using an online appraiser or doing a professional appraisal – which should be a last resort due to the associated costs.

Your lender additionally helps identify your home’s current value, according to Jonathon Meyer, loan expert for The Mortgage Reports and MLO Chartered.

Through the refinancing process, a loan officer could enter the value and Fannie Mae or Freddie Mac (for conventional compliant mortgages) could accept it through their automated underwriting system. If Fannie or Freddie accepts the value, you can get an appraisal waiver that eliminates the appraisal fee. You should check with your lender, Meyer said.

Note: Assessment waivers cannot be obtained for a value greater than $ 1 million.

What is the equity in a “usable” home?

Marketable equity is the total you can actually take out of the value of your home. Typically, this amount equals your overall equity minus 20% of your home’s value.

Mortgage lenders normally want 20% left as a buffer for financial protection in case the borrower defaults on the loan.

Based on the example above, your 20% buffer is $ 55,000 ($ 275,000 x 0.2). This is subtracted from the total amount of equity to give you your working capital. In this case, $ 125,000 minus $ 55,000 leaves you with $ 70,000 to draw on.

Like most rules, there are exceptions. Some lenders will let you exceed the loan-to-value ratio (LTV) of 80%, and borrowers with VA loans might be allowed to forgo the cushion altogether.

How to take equity in your home

The exploitation of your capital comes mainly from three options:

  1. Refinancing of collection: You take out a new primary mortgage to replace your existing loan. The new loan has a larger balance than you currently owe, with that “difference” returned to you in cash. Refinance closing costs averages around 2-5% of the loan amount and is usually deducted from your total cash back
  2. Home equity loan: A Home Equity Loan (HEL) is a type of second mortgage. You keep your existing mortgage with one HEL and take out a second against the equity in your home. HEL closing costs are generally lower, but these loans may have slightly higher interest rates than withdrawals.
  3. Home equity line of credit (HELOC): Home equity lines of credit typically have variable rates and low or no closing costs. They work the same way as a credit card, where you have a limit that you can borrow up and pay off again and again. You only pay interest on any outstanding loan balance. HELOCs have defined “drawing periods” after which you must fully repay the remaining balance.

Benefits of tapping into your home equity

Used with caution, home equity has tangible financial benefits.

This additional influx of money can be used to pay off or consolidate higher interest debts, such as student loans or medical bills. Or it can further increase the value of your home if it is used to renovate or improve your property.

In an environment of low mortgage rates, borrowing against the equity in your home to pay for large expenses is probably cheaper – especially in the long term – than other types of loans.

Check your mortgage withdrawal rates. Start here (December 7, 2021)

Reasons Against Cashing In on Home Equity

Every coin has two sides, and tapping into your home’s equity can have its downsides as well.

Whether through refinancing or a line of credit, digging into your home equity comes with taking out a new mortgage. You just want to make sure that you are able to pay whatever your new monthly payments are.

Plus, a cash refinance likely extends the life of your home loan, resulting in higher interest payments for each additional year. Refinancing to a 15-year mortgage versus a 30-year mortgage can also be an option, but that likely comes with higher monthly payments.

To find out what refinancing would look like for you, see our refinancing calculator.

What are today’s mortgage withdrawal rates?

Interest rates for cash refinancing tend to be slightly higher than rate and term refis, while rates for home equity loans and HELOCs are even higher.

Mortgage rates today still hover near their all-time lows and would benefit any homeowner who borrowed before collapsing in 2020.

Check your withdrawal eligibility and the latest interest rates to see if leveraging your home equity makes sense for you.

Check your new rate (December 7, 2021)

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