Here’s how to tap your home equity as mortgage rates rise

Here's how to tap your home equity as mortgage rates rise
Written by Publishing Team

For many homeowners, the pandemic has presented an unprecedented opportunity to build wealth. These opportunities still exist, although they are hard to come by.

Thanks to skyrocketing home prices, the volume of home ownership is at an all-time high.

As of the third quarter of last year, homeowners had $9.4 trillion in equity to tap, the largest amount ever recorded, according to the latest data from Black Knight, a mortgage research and technology firm.

For the average homeowner, that’s roughly $178,000 in available and clickable equity before hitting the maximum pooled loan-to-value ratio of 80%, according to Black Knight Data & Analytics President Ben Graboske. (Most lenders require that you keep at least 20% of the equity in your home, if not more, as a pillow in case home prices drop.)

However, taking advantage of all that extra cash becomes more difficult as interest rates rise.

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Mortgage rates are already trending higher, thanks in part to inflation and the Federal Reserve.

Recent inflation reports have reached their highest levels in decades. The Consumer Price Index, which measures the cost of a broad basket of goods and services, rose 6.8% year over year, the fastest rate since June 1982.

In response, the Fed signaled that it would roll back its economic aid faster than expected, with Fed officials seeing up to three rate hikes this year, two more next year, and two more in 2024.

This causes long-term fixed mortgage rates to rise. Indeed, the average rate on a 30-year fixed mortgage is 3.33% — now about half a percentage point higher than it was a year ago.

“With inflation rising, promising economic growth and a tight labor market, we expect rates to continue rising,” said Sam Khater, chief economist at Freddy Mac.

By the end of 2022, average mortgage interest rates will be as high as 4%, according to Channel Jacob, chief economist at LendingTree.

“There is still plenty of time for people to take advantage of their home ownership either with a home loan or refinance,” he said. However, the “window of opportunity is closing”.

The best ways to make use of your home to get money

When rates are low, the so-called cash refinancing is especially attractive. Homeowners can refinance their existing mortgage, get a larger mortgage and lower their interest payments at the same time.

So far, applicants with good credit may get an average of 3% or less.

“If you can get it in the next few months, hopefully before the summer, you might still be able to find a really good deal,” the channel said.

Homeowners may also be able to deduct interest on their first $750,000 of a new mortgage if the withdrawal funds are used for capital improvements (although fewer people are detailing now, most households won’t benefit from this write-down).

You may still be able to find a really good deal.

Jacob’s channel

Senior Economic Analyst at LendingTree

Alternatively, a line of credit for the purchase of a home, or HELOC, a revolving line of credit but at better rates than a credit card, is another way to borrow against the capital you have accumulated in your home.

The average interest rate on this type of credit is around 5%. Credit cards charge about 16% on average.

Fewer banks offered this option during the height of the Covid pandemic, when lenders tightened their criteria to reduce their risk. Now, however, access to HELOCs has improved even though the most favorable terms still go to borrowers with higher credit scores and lower debt-to-income ratios.

Choosing between cash refinancing or HELOC will depend on how much equity you have in your home and your time frame, according to Christian Wallace, head of real estate services at Better Home Finance.

For example, if you want a short-term commitment and don’t have a lot of equity to cash in, a HELOC might be your best bet. Alternatively, if you can refinance and lower the interest rate by at least half a percentage point, cash withdrawal may be in your favor.

“Every case will be different,” Wallace said.

Keep in mind, she added, that different lenders will also offer different terms and interest rates. Wallace recommends talking to at least three mortgage companies or loan officers, as well as weighing all costs before deciding what makes the most sense.

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