The US real estate market is often described these days as a place where the dreams of first-time buyers go to die. But it can be easy to forget (or ignore) just how positively homeownership impacts Americans lucky enough to survive the challenge.
Thanks to escalating home prices, about 46 million homeowners had a record $ 7.3 trillion in equity at the end of 2020, according to mortgage and data technology provider Black Knight. This equates to an average value of $ 158,000 per owner.
If you live in a hot market and have held onto your property during the last year of the real estate craze, you are essentially living in a giant piggy bank. And, you have a few ways to shake up some of the money.
Take out a home equity loan
A home equity loan is often referred to as a âsecond mortgageâ. When you ask for it, you are asking for a fixed amount of money and using the equity in your home as collateral. If your lender agrees to play ball, you’ll receive the full amount all at once, then start paying it off – on a fixed payment schedule and at a fixed interest rate.
You will need enough equity in your home to provide security. And, having good credit will improve your chances of accessing the money you need. Take a free look at your credit score and see if it needs to be fixed.
In addition to uses that include paying off debt or covering a child’s education costs, a home equity loan can help make your home more valuable. Typically, the interest rate will be lower than the rate on a credit card or personal loan, so a home equity loan can fund home improvement projects that add value.
Loans can also be prepaid and refinanced at lower rates. If you had taken out a home equity loan in late 2019, before COVID lowered interest rates, you could refinance it to much lower rates today and lower your monthly payments.
Open a HELOC
While a home equity loan provides a one-time injection of cash and charges you a fixed interest rate, a home equity line of credit is an ongoing arrangement that involves a variable rate. But HELOCs are a bit more complicated than that.
They are broken down into two parts: the withdrawal period, during which you can withdraw money at your own pace until your borrowing limit is reached; and the repayment period. Both phases can extend over years or even decades in the event of a repayment. But once the drawdown period is over, your HELOC loan is over.
Although this is called the drawdown period, you still need to make payments during this stage of the loan. Payments are often quite manageable as they only relate to interest. Once you officially enter the repayment period, your loan principal goes into your payments – and they become a lot bigger.
This is one of the most important risks of a HELOC: uncertainty. You won’t be making any fixed payments or fixed interest rates, and these things can make an equity line a challenge on the budget.
If you get to the point where you are having trouble making your HELOC payments, you can refinance the outstanding balance into a fixed rate home equity loan, although you may need to maintain your credit rating to be certain of it. get a fair rate. .
Make a cash-out refinancing
While HELOC interest rates and home equity loans are hard to come by below 4%, a cash refinance might be your best and most affordable option to tap into your home equity.
And since rates today are almost certainly lower than they were when you first got your mortgage, refinancing is a great way to save money. Black Knight recently discovered that with mortgage rates this low, 14.1 million homeowners could save an average of $ 287 per month by refinancing.
In a withdrawal refi, you replace your current mortgage with a new, larger one, and you take the difference in cash. The new loan pays off the existing mortgage and is then paid off in monthly installments.
Lenders typically allow you to borrow 70-80% of the value of your home in a refi. If your home is worth $ 400,000 and your lender approves an 80% refinance, you will receive up to $ 320,000. If you still owe $ 200,000 on your first mortgage, you would pay that off and have $ 120,000 in tax-free money to play.
The closing costs for a withdrawal refi are often higher than what you would pay on a home equity loan, but cheaper interest rates are hard to refuse.
Whichever way you choose to access your equity, speak with a financial advisor to make sure it’s the smart move for you. Whether it’s a refi loan, HELOC, or home equity loan, your home will be your collateral. If you fall behind on your payments, you could end up losing the house and all of your equity will disappear.
Other ways to unlock extra money
Homeownership can be a constant financial chore. From mortgages to taxes to maintenance costs, rarely a day goes by without a major expense taking up at least a small portion of your cranial real estate.
If your home sweet home is a bitter pill for your budget, there are several ways you can boost your finances.
Lower your insurance costs. If it’s time to buy or renew your home insurance, getting quotes from multiple insurers can help you get the best deal and avoid paying too much. Comparison shopping can also work wonders when trying to save money on auto insurance.
Eliminate high interest rate debt. If you’ve used credit cards to cover the extra costs of owning a home, those high interest rates can be a real drag. Consider consolidating all of your debt into one low interest debt consolidation loan to pay off your debt faster and at lower cost.
Generate more income – on the stock market. You don’t need the proceeds of a big cash withdrawal to enjoy today’s stock market fun. A popular app helps you invest in a diversified portfolio using little more than the âspare currencyâ of your daily purchases.