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After years of upward momentum, house prices across the country are showing mixed signals.
According to March 2023 data from Redfin, home prices nationwide fell an average of 3.3% from a year ago. Meanwhile, the most recent Black Night Mortgage Monitor report revealed that prices were rising in 92% of all markets from February to March, and in 40% of large markets they even returned to peak prices.
If you’re like most American homeowners, your home’s value has risen during the pandemic — meaning you may now be sitting on a large amount of home equity. Data from real estate research firm CoreLogic shows that American homeowners had an average of $270,000 in home equity at the end of 2022, up $90,000 from pre-pandemic values.
With such significant equity in your home, you may be able to tap into it to help cover expensive expenses, a fund Home improvement projects or Debt Consolidation. Alternatives to borrowing from home equity, eg Home equity loans, HELOCsAnd Cash-out refinancingOften have more favorable interest rates than credit cards and personal loans.
But before you start the borrowing process, it’s essential to find the best option for using your home equity based on your financial goals and other factors.
Start exploring your home equity options now to learn more
How to Use Home Equity When Home Prices Are High
Here are four home equity options to strongly consider right now while the price is still high.
Home equity loan
A Home equity loan An installment loan is that Allows you to borrow A portion of your home equity (usually 75% to 85%) for virtually any purpose. Generally, these loans come with fixed interest rates and repayment terms ranging from 5 to 30 years.
you can Calculate your home equity Uses the difference between the balance you owe on your mortgage loan and the current market value of your home. Let’s say you purchased your home for $300,000 and will pay $100,000 on your mortgage over time. This puts your mortgage balance at $200,000. At the same time, the value of your home increases by $100,000 to a fair market value of $400,000. In this case, your home equity would be $200,000 ($400,000-$200,000).
Now, you can use that same number to find your home equity loan potential. If your lender allows homeowners to borrow up to 80% loan-to-value (LTV), you’ll know you could qualify for a home equity loan of up to $160,000 (200,000 x 80%).
However, you should only borrow the amount you need because you will be paying the interest on your entire loan. With good credit, you can qualify for a home equity loan Today rates are as low as 6% – 8%.
As with other home equity borrowing options, you must put up your home as security for the loan, meaning you could lose your home if you default.
Check out your home equity loan options here.
HELOC
A Home Equity Line of Credit (HELOC) Allows you to access your home equity as revolving credit, similar to a credit card. one Benefits of HELOCs You do not need to withdraw the entire amount you have been sanctioned for. You can borrow as much as you need, when you need it. This can help you keep your overall interest balance low, since interest is only charged on the amount you withdraw from your HELOC.
But the interest you pay shouldn’t be the only thing you consider. “Base your decision about your HELOC term and your HELOC amount based on cash flow, not interest rates,” says Ben Miller, branch manager at American Mortgage Network. “Where’s your budget? Let’s talk about your comfort zone. Where do you need to be?”
As with home equity loans, you’ll also have to pay off either account Closing costs You will pay for a HELOC. These can range from 2% to 5% of the amount you borrow, although some lenders do not charge closing fees. Of course, you’ll want to shop around between lenders and compare interest rates to get the best rate.
Check out your HELOC options here to learn more
Cash-out refinancing
A Cash-out refinancing Involves refinancing your existing mortgage into a larger loan, which allows you to tap into a portion of your home equity. In the end, you’ll be able to borrow a larger loan amount but still have a bunch of cash on hand. Although a home equity loan can be called a Second mortgageAn additional loan in addition to your first mortgage, a cash-out refinance is a single loan
Here’s how it works: Let’s say you own a home with a market value of $800,000 and have $400,000 remaining on your mortgage balance. Lenders typically allow you to borrow up to 80% loan-to-value, which means you can qualify to borrow up to $320,000 (80% of $400,000 home equity). With a cash-out refinance, you take out a new loan, use it to pay off your current mortgage, and use the resulting cash at your disposal.
While cash may come in handy, it makes you take on more debt. And if you start a new 30-year loan, you may pay more interest over the life of the loan.
Check out your refinancing options here to learn more.
reverse mortgage
Many retirees and older Americans may consider one Reverse mortgage As a way to use their home equity to help meet living expenses or other objectives.
The most common type of reverse mortgage is called a home equity conversion mortgage (HECM) and is only available to homeowners 62 and older. You must continue to use the home as your main residence, but you no longer have to make monthly mortgage payments. Instead, you or your heirs will pay the debt when you’re no longer there.
Your balance will continue to grow as interest and fees are charged to your loan balance each month. Plus, you’re still responsible for paying property taxes and homeowners insurance. A reverse mortgage can benefit seniors who are “home rich,” with lots of home equity but little cash flow for day-to-day expenses. However, be aware that your balance will increase and your home equity will fall over time. In the end, you or your heirs still have to pay off the loan, which most people do when they sell the house.
Bottom line
With house prices significantly higher Higher in many parts of the country Today, more than before the pandemic, you may have enough home equity to access the cash you need for emergency expenses, debt consolidation or renovation projects. With home equity loans and HELOCs, you may even qualify for one Tax deductions If the funds are “used to purchase, construct or substantially improve a qualified home,” according to the IRS.
Before you apply, look at your personal finances to determine how a new loan payment will fit into your budget. Additionally, shop around and compare lenders to identify which offers the lowest costs.
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