How to unlock the equity in your home

With the values of homes surging, U.S. homeowners have record amounts of equity available to them. Here are a few ways to cash in.

  • By Daniel Bortz,
  • The New York Times News Service
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Good news, homeowners: now may be a great time to unlock your home equity.

Home values have soared since the pandemic began. The national median existing-home price hit a record high of $363,300 in June, up from $294,400 a year ago, according to the National Association of Realtors. As a result, the average U.S. homeowner now has $153,000 in tappable equity, according to a May report from the mortgage data firm Black Knight.

“American homeowners already had record levels of tappable equity available to them before Covid-19, and the boom we’ve seen in home prices over the last year has increased those levels even further,” said Andy Walden, Black Knight’s vice president of market research.

Collectively, U.S. homeowners have seen their equity explode by a total of nearly $1.9 trillion from the first quarter of 2020 to the first quarter of this year, CoreLogic’s quarterly Homeowner Equity Insights report found. That’s created an opportunity for flush homeowners to get their hands on a quick infusion of cash, said Guy Cecala, the chief executive and publisher of trade publication Inside Mortgage Finance.

There are three ways you can tap into your equity. Here’s what you need to know about each option before you cash in.

Cash-out refinance

With a cash-out refinance, you take out a new mortgage — most lenders will allow only up to 80 percent of your home's value — for more than what you owe on your current mortgage and pocket the difference between the two loans in cash. For example, let’s say you own a $400,000 home and still owe $100,000 on your mortgage. If you get approved for a new loan for $150,000, you’d get $50,000 in cash, minus the closing costs for your new mortgage. (Closing costs typically run between 2 percent and 5 percent of your loan amount, but they can vary by lender, so it pays to shop around.)

Given today’s low mortgage rates — the average rate for a 30-year mortgage fell to a bargain 2.78 percent the week ending July 22, according to Freddie Mac’s weekly Primary Mortgage Survey — a cash-out refinance is “a steal right now,” said Heather McRae, a senior loan officer at Chicago Financial Services.

“A cash-out refinance is such a cheap way to borrow money right now,” Mr. Cecala said. “The one time you don’t want to do a cash-out refi is if you’re going to get a higher mortgage rate than what you’re currently paying, because that’s going to increase your monthly mortgage payment,” he added.

Home equity line of credit

A home equity line of credit, or “HELOC,” is exactly like it sounds: it’s a line of credit that allows you to borrow money against your home. Like a credit card, you have a set limit of how much you can spend at any given time — typically, you can borrow up to 85 percent of the value of your home. One advantage of a HELOC, Ms. McRae said, is that you pay interest only on the money that you borrow. That’s a nice feature if you’re not sure how much money you’re going to need, such as if you’re planning to make a few home improvements where costs can fluctuate depending on building material availability.

The main drawback? A HELOC has a variable interest rate — rates currently range from 3.50 percent to 8.63 percent depending on your credit score, according to ValuePenguin, a financial research firm. That means your line of credit’s interest rate can go up if the Federal Reserve raises the federal funds rate, which is currently set at a range of 0 percent to 0.25 percent.

Home equity loan

If you’re looking for a consistent monthly payment, Ms. McRae recommends a home equity loan, which comes with a fixed interest rate. With a home equity loan, you receive a lump sum of cash and pay the loan back in installments over a set period of time ranging anywhere from five to 30 years.

Because you receive the cash upfront, “a home equity loan is designed for someone who knows exactly how much money they need to borrow,” said Jon Giles, TD Bank’s head of home equity lending.

But, there are a few downsides: home equity loan interest rates are usually higher than HELOC rates, at least when you first open a HELOC; most lenders allow you to borrow up to only 80 percent of your home’s value; and you’re now on the hook for two mortgages.

Before tapping your home equity

Whether you’re eyeing a cash-out refinance, home equity line of credit, or home equity loan, experts recommend assessing how you’re planning to spend the cash before you unlock your home equity. “There are good ways and bad ways to spend your equity,” Ms. McRae said. “Are you going to use the funds to make home improvements that will raise the value of your home? Are you going to pay off high-interest debt? Or are you going to use the money to take a trip to Tahiti?”

“I recommend speaking to a financial adviser to discuss how you’re planning to spend the funds before you tap your home equity,” Ms. McRae added.

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