How to Access Valuable Home Equity
A home’s tappable equity is equal to the current value of the home minus the mortgage balance. In 2017, tappable home equity, or the amount of equity borrowers could withdraw from their homes, rose by a record $735 billion, the largest annual increase ever, to a national level of $5.4 trillion. As home values continue to rise, many homeowners are considering tapping into their homes’ equity to pay for expenses like college tuition, healthcare, and home renovations or to pay down other debts or invest elsewhere. A home’s equity can be a great financial tool, but it can also be a great way to save for the future.
Before you start the process of tapping into your home’s equity, here’s what you should consider.
Most lenders recommend you keep at least 20% equity in the home as a cushion, in case home prices fall or other financial problems arise. If you have built more than 20% equity in your home, you can access the equity through a cash-out refinance or a home equity line of credit (HELOC).
When other refinancing activity contracts, cash-out refinance activity tends to rise. In the first quarter of 2018, cash-out refinances made up 62% of all refinance activity. For a cash-out refinance, the homeowner refinances the original mortgage at a greater value and withdraws the difference. A cash-out refinance is typically a better option when current interest rates are lower than the interest rate on the original mortgage.
Another option for accessing home equity is through a home equity line of credit or HELOC. With a HELOC, the homeowner takes out a second loan on the home, keeping the original mortgage. The equity can be distributed as a lump sum or a home equity line of credit that functions like a checking account. A HELOC is the better option if interest rates have increased since the original mortgage was originated.
With any refinance, the homeowner will have to pay lender and origination fees, like they did when the original mortgage was originated, and these costs should be considered. With home values on the rise, more and more homeowners are considering tapping into their home’s valuable equity. Before you make any refinance or HELOC moves it is best to evaluate your goals with a mortgage professional.
Sources: CNBC, HousingWire