With loan costs at their highest level in more than two years, many homeowners may not have time to think about refinancing. But some can still find money in the equity they have accumulated in their home.
According to the latest chart from data firm Black Knight, more than five million homeowners are no longer good candidates for refinancing as mortgage rates have soared in recent weeks. As of this writing, the Freddie Mac rate on 30-year fixed loans was 3.75%, the highest in what seems like ages.
Still, according to Black Knight’s tally, that leaves about 5.9 million borrowers who can cut at least 0.75% off their current rate. (The company defines a good refinance prospect as someone with a credit score of at least 720, who owes less than 80% of the value of their current home.) A lucky few could save over $700.
But there are other ways to skin that cat, especially for those who don’t meet the above criteria. We’re talking about home equity loans and home equity lines of credit, both of which can be used to unlock the value that has accumulated in your home since you bought it. Combine those paper earnings with the amount you’ve paid off your mortgage balance during that time and you’ve probably got a pretty decent nest egg to tap into.
Equity is the difference between the value of your home and what you still owe on your mortgage. Of course, newer buyers haven’t built up as much equity as those who have been in place for a while. Even so, over the past 12 months, CoreLogic reports that the typical owner has earned $56,700 in equity.
Older owners have done even better. According to the National Association of Realtors, someone who bought an existing home 10 years ago at the median sale price of $169,000 would have recouped an average of $225,000 in equity if the place had sold for 363. $100, the median in the third quarter of last year. The gain comes from an appreciation of $193,600 and $31,300 from capital repayments.
Over a five-year period, that same owner would have earned $144,500 in equity: $121,800 in appreciation and $22,700 in return of capital. NAR did not calculate the figures for only one year of ownership. But house prices have jumped nearly 20% in the past 12 months by some estimates, so do the math.
To get this money, consider either a home equity loan or a home equity line of credit. They look alike, but they are somewhat different.
With a loan, you get a lump sum at closing based on a percentage of equity that you can borrow against – usually 70% to 80%. The rate is fixed and you must start making payments immediately.
With a line of credit, you can withdraw the product as you see fit: all at once, in one payment at a given time, or in various amounts according to your needs. You won’t have to make any payments until you receive the money. But the rate is variable, so the amount you pay can change, even if you don’t take any more money.
These loans are not cheap, with rates currently up from 6% and still rising. But since they’re secured by your home, they’re often less expensive than other choices. As LendingTree senior economics analyst Jacob Channel points out, “They’re still likely to have relatively low interest compared to other types of loans, like personal loans or credit cards.”
Like any other second mortgage, equity loan proceeds can be used for anything you want: home renovations, debt consolidation, wedding expenses or traveling around the world.
According to a recent study by LendingTree, home improvement is the number one reason people seek out these products. About a quarter aim to consolidate their debt and about 1 in 10 intend to invest the money. But leaving for a long-awaited trip is not necessarily a good idea.
“Home equity loans are incredibly versatile” for people who need cash right away, Channel says. But “it’s never a good idea to borrow money casually, and anyone considering a home equity loan should fully understand the risks involved before rushing to get one.”
Meanwhile, seniors have a third way to access their home bank accounts: reverse mortgages. And according to the National Reverse Mortgage Lenders Association, they have a lot of dough hidden in their homes. Wealth in seniors housing rose 4% — or $396 billion — in the third quarter or 2021, to a record $10.19 trillion, the trade group recently reported.
Available to homeowners age 62 and older, reverse mortgages allow seniors to borrow against the equity in their home without having to make monthly principal or interest payments. Funds are advanced to the borrower and interest accrues, but neither the outstanding balance nor interest is due until the last borrower leaves the home, either by selling or by death.
Several private lenders offer exclusive reverse products. But the vast majority – known more formally as home equity conversion mortgages – are underwritten by Uncle Sam’s Federal Housing Authority. Either way, though, they don’t come cheap. and they are usually charged with upfront fees.
Lew Sichelman has been covering real estate for over 50 years. He is a regular contributor to numerous shelter magazines and housing and housing finance industry publications. Readers can contact him at [email protected]