Home Prices Keep Rising: How to Tap Into Your Home Equity and Snag a Lower Interest Rate

Home Loans

Home prices have skyrocketed since the beginning of the pandemic and continue to increase across the US. In 2020, millions fled major cities for more space in the suburbs during the pandemic, increasing demand and driving up prices. Meanwhile, material shortages continue to inflate the price of new construction. Low inventory and cash-wielding house hunters continue to squeeze an already tight market even tighter — and experts expect this trend to continue well into 2022.

These dynamics have combined to put many prospective buyers — and some existing homeowners — in a precarious position, potentially priced out of the market where they live. But there have been winners, too. If the market value of your home is higher than the amount you still owe on your mortgage, you have a real opportunity to leverage that differential. 

Below are a few ways to harness your home equity. 

Refinancing can help you snag a lower interest rate, which can shorten your loan term, shave down your monthly payment and reduce the overall cost of your mortgage. It can also help you wriggle out of paying private mortgage insurance (PMI) if increased home value has grown your equity past the 20% threshold. Refinancing can also provide a way to pay down high-interest debt, like a credit card balance, or take cash out to finance a renovation or improvement.

The number of people refinancing surged during the pandemic, according to Freddie Mac. Single-family refinances totaled $2.6 trillion in 2020 — the highest amount since 2003.  Rising interest rates have since caused the number of people refinancing to slow and refis are at their lowest level in three years. Refinance activity is down 80% from 2021 and now accounts for just 35% of market share, the lowest point since May 2019, according to Black Knight, a mortgage data company. Still, rates are historically low and Freddie Mac anticipates $1.2 trillion in refinance activity this year. So If you haven’t looked at your interest rate recently, stop reading and do it now

And, since the Federal Reserve is expected to raise interest rates multiple times this year — with a likely increase expected later this week — you may want to lock in a low refinance rate sooner rather than later.

These secured loans let you borrow a lump sum against your home equity. The specific loan terms depend on all of the usual financial credentials — your credit score, debt payment history and income — and lenders generally require at least 15% equity to qualify. Home equity loans typically feature a fixed interest rate, but repayment periods can vary (though most are for 15 or 20 years). 

To secure the best terms, the Federal Trade Commission recommends negotiating with multiple lenders and allowing them to compete for your business. Negotiable items might include lower fees, mortgage point prices and the fixed interest rate. 

This revolving line of credit, which features a preset limit and variable interest rate, lets you withdraw, pay back and then withdraw again (if you like). Depending on your creditworthiness and debt-to-income ratio, you may be able to borrow up to 85 percent 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 typically come with the highest interest rates since they are variable and the loan is a type of revolving credit.

In essence, a cash-out refinance lets you borrow a lump sum of money at a fixed — and right now, a 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 some amount of cash. You may be able to borrow up to 80% of the loan-to-value ratio, which means that after subtracting the cash-out, you’ll still have 20% equity in your home.

Cash-out refinance loans usually have better interest rates than home equity loans because they are repaid before home equity loans during bankruptcy or foreclosure. Still, your specific terms will depend on your credit score, home value, income, and other factors. A knowledgeable mortgage broker should be able to help you weigh the pros and cons of each. 

The most obvious way to tap into your home equity is to sell. If there’s excess money after you pay off your mortgage, you could use it to finance a cross-country move or a down payment on a new house. Last May, The Wall Street Journal reported that more than seven million households moved to a different county during the COVID-19 pandemic in 2020 — nearly half a million more than in 2019. Remote working options and the desire for more space spurred a mass exodus from dense metropolitan areas into more affordable areas.

If your home’s new value has you feeling like cashing in, keep a few things in mind before calling a listing agent:

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