Your Home Is Worth More Than You Paid For It: Here Are 4 Ways To Leverage Your Home Equity
Home prices are skyrocketing in the United States. When the pandemic struck last year, millions of people fled major cities for more space in the suburbs, increasing demand and pushing up prices. Meanwhile, material shortages have inflated the price of new construction. Low inventories and cash-strapped house hunters continue to tighten an already tight market even further: Now new listings stay on the market for just six days on average and prices are expected to rise by around 18% of here the end of the year.
These dynamics have combined to put many potential owners – and some existing owners – in a precarious position, potentially overpriced in the market in which they live. But there were also winners. If the market value of your home is more than the amount you still owe on your mortgage, you have a real opportunity to take advantage of that differential. Here are a few ways to leverage your home equity.
Refinance your mortgage
The number of people refinanced has skyrocketed during the pandemic, according to Freddie Mac. Single-family home refinances totaled $ 2.6 trillion in 2020, the highest amount since 2003. If you haven’t looked at your interest rate lately, stop reading and.
Refinancing can help you get a lower interest rate, which can shorten your loan term, lower your monthly payments, and lower the overall cost of your mortgage. It can also help you avoid paying for private mortgage insurance (PMI) if the increase in the value of the home has caused your equity to increase beyond the 20% threshold. Refinancing can also provide a way to consolidate high interest debt, such as a credit card balance, or to withdraw money to finance a renovation or improvement.
Get a home equity loan
These secured loans allow you to borrow a lump sum against the equity in your home. The specific loan terms depend on all the usual financial information – your credit score, your debt repayment history, and your income – and lenders typically require at least 15% equity to qualify. Home equity loans usually have a fixed interest rate, but repayment periods can vary (although most are 15 or 20 years).
To get the best deal, the Federal Trade Commission (FTC) recommends negotiating with multiple lenders and allowing them to compete for your business. Negotiable items may include lower fees, mortgage points and the fixed interest rate.
Open a Home Equity Line of Credit (HELOC)
This revolving line of credit, which has a pre-set limit and a variable interest rate, allows you to withdraw, repay and withdraw again (if you wish). Depending on your creditworthiness and your debt ratio, you can borrow up to 85% of the appraised value of your home, less the amount you owe on your mortgage. When you need cash, you can write a check or use the credit card attached to the HELOC account. Like other types of credit cards, you cannot spend more than the credit limit, and HELOCs usually carry the highest interest rates because they are variable and the loan is a type of revolving credit.
Refinancing of collection
Essentially, a cash refinance allows you to borrow a sum of money at a fixed – and currently, potentially very low – interest rate. Rather than attaching a second loan to your original mortgage like a home equity loan, this loan pays off your first mortgage and replaces it with a new one that includes a certain amount of money. You may be able to borrow up to 80% of the loan-to-value ratio, which means that after you subtract the withdrawal, you will still have 20% of the equity in your home.
Cash refinance loans generally have better interest rates than home equity loans because they are paid off before home equity loans in bankruptcy or foreclosure. Nonetheless, your specific conditions will depend on your credit score, the value of your home, your income, and other factors. A knowledgeable mortgage broker should be able to help you weigh the pros and cons.
Sell ââyour house
The most obvious way to build equity in your home is to sell. If there is excess money after paying off your mortgage, you can use it to finance a move abroad or a down payment for a new home. In May, the Wall Street Journal reported that more than seven million households moved to another county during the COVID-19 pandemic in 2020 – nearly half a million more than in 2019. Work options distance and the desire for more space have spurred a mass exodus from dense metropolitan areas to more affordable areas.
If your new home value makes you want to cash in, keep a few things in mind before calling a listing agent:
- The competition is fierce. We’ve learned that most homes only stay on the market for 7 days, which means you’ll have to make quick decisions when buying. One way to speed things up is to get mortgage pre-approved before you start shopping. Pre-approval allows your real estate agent to submit an offer immediately, which could make all the difference in a competitive market.
- A bargain on home equity is rare. The United States has not experienced such a real estate boom for almost 25 years. While selling your home can dramatically increase your equity, it is wise to consider all of your options before purchasing another property. Consult a financial advisor to learn about the different ways to use a financial windfall, real estate included.