Culture Room Exclusive/twinpix | Image Source | Getty Images
Home equity is near all-time highs. But financial advisers say taking advantage of the opportunity may be difficult because of higher interest rates.
Total home equity of U.S. mortgage holders rise to According to the latest data from CoreLogic, it will exceed $17 trillion in the first quarter of 2024, just shy of the record set in the third quarter of 2023.
Average assets per borrower increased by $28,000 from a year ago to about $305,000, according to CoreLogic. Chief economist Selma Hepp said that was an increase of nearly 70% from $182,000 before the Covid-19 pandemic.
About 60% of homeowners secured loan. Their equity is equal to the value of their home minus any outstanding debt. Total home equity of U.S. homeowners The total value of secured and unsecured loans is $34 trillion.
Hupp said the increase in home equity is largely due to rising home prices.
Many people also refinanced their mortgages early in the pandemic, when interest rates were “very, very low,” potentially allowing them to pay down their debt faster, she said.
“For people who owned a home at least four or five years ago, on paper they feel fat and happy,” said Lee Baker, founder, owner and president of Apex Financial Services in Atlanta.
Baker, a certified financial planner and a member of CNBC’s advisory board, and other financial advisors say achieving wealth is complicated, however, by the high cost of borrowing.
Kamila Elliott, CFP, co-founder of Collective Wealth Partners and a member of CNBC’s advisory board, said: “Some options that may have been attractive two years ago are less attractive now because interest rates have risen. a lot of.
Still, it might make sense in some cases, advisers said. There are several options here.
Home Equity Line of Credit
Grace Cary | The Moment | Getty Images
A home equity line of credit (HELOC) is often the most common way to tap into home wealth, Hupp said.
A HELOC allows homeowners to borrow money against the equity in their home, usually for a fixed term. The borrower pays interest on the outstanding balance.
According to Bankrate data as of June 6, the average interest rate on a HELOC was 9.2%. (Homeowners may also consider home equity loanusually a fixed rate.
For comparison, the interest rate on a 30-year fixed-rate mortgage about 7%according to Freddie Mac.
More from Personal Finance:
Buying a house made famous by Home Alone or John Lennon? Expect premium
Buying a house “absolutely does not require” a 20% down payment
What to expect from the real estate market this year
Elliott said that while HELOC rates are higher compared to typical mortgages, they are much lower than credit card rates. Credit card holders with an account balance can average interest rate That’s about 23%, according to the Federal Reserve.
Borrowers generally can Clicks up to 85% Their homes are worth less outstanding debt, according to Bank of America.
Homeowners can use a HELOC to pay off outstanding high-interest credit card debt, Elliott said. However, she added, they must have a “very targeted plan” to pay off the HELOC as quickly as possible, preferably within a year or two.
For people who owned a home at least four or five years ago, on paper they feel fat and happy.
Lee Baker
Certified Financial Planner
In other words, don’t just make your minimum monthly payments — it may be tempting, since those minimum payments may be lower than your credit card’s minimum payments, she says.
Likewise, Elliott explained that homeowners who need to make home repairs or improvements can use a HELOC instead of a credit card. There may be an added benefit: Those who itemize their taxes may be able to deduct the loan interest on their tax returns, she added.
reverse mortgage
A reverse mortgage is a way for older Americans to tap into their home equity.
Like a HELOC, a reverse mortgage is a loan against the equity in your home. However, borrowers don’t pay off the loan every month: Over time, the balance increases as interest and fees accrue.
Advisers say reverse mortgages may be best for people who have most of their wealth tied up in their homes.
“If you’re starting late in retirement (savings), this is another potential source of retirement income,” Baker said.
Home Equity Conversion Mortgage (HECM) Yes most common type Reverse mortgages, according to the Consumer Financial Protection Bureau. It is available to homeowners 62 and older.
Reverse mortgages can be offered as a lump sum, a line of credit, or as monthly installments. It’s a non-recourse loan: You can live in the home as long as you want, if you take steps such as paying property taxes and maintenance costs, and make the home your primary residence.
Borrowers can typically access up to 60% of their home’s equity.
The homeowner or his or her heirs must eventually repay the loan, usually through the sale of the home, according to the CFPB.
While reverse mortgages often leave heirs with less money, that’s not necessarily considered a financial loss to them: Without the reverse mortgage, Elliott said, those heirs may have been paying out of pocket to help subsidize The borrower’s retirement income.
sell your house
Alexander Spatari | Moment | Getty Images
Historically, the biggest advantage of having home equity has been accumulating more money to invest in a future home, Hupp said.
“Historically, this is how people have been able to move up the housing ladder,” she said.
But homeowners with low fixed-rate mortgages may feel Because interest rates on new loans for new homes are relatively high, they are locked into their current homes.
Moving and downsizing are still options, but “the math doesn’t really work in their favor,” Baker said.
“Not only has their house increased in value, but everything else in the neighborhood has increased in value,” he added. “If you’re looking for something new, you can’t do much with it.”
cash out refinance
Elliott said cash-out refinancing is another option but should be considered a last resort.
“I don’t know anyone recommending a cash-out refinance right now,” she said.
A cash-out refinance replaces your existing mortgage with a new, larger mortgage. The borrower will pay the difference in a lump sum.
Here’s a simple example: Let’s say a borrower owns a home worth $500,000 and an outstanding mortgage of $300,000. They might refinance a $400,000 mortgage and receive the $100,000 difference in cash.
Of course, they may be able to refinance at a higher interest rate, which means their monthly payments could be much higher than their existing mortgage, Elliott said.
“It’s really about crunching the numbers,” Baker said of homeowners’ options. “Because you’re putting a load on your roof. It can be a precarious situation.”
About The Author
