In the first quarter of this year, 44.9 percent of U.S. residential homes with mortgages were equity-rich. This was in the findings of the 2022 U.S. Home Equity & Underwater Report of ATTOM, a curator of data for real estate. To be equity-rich, the remaining loan balance of a home should be 50 percent or less of its estimated current market value. The number of equity-rich homes increased from 41.9 percent in the last quarter of 2021.
If you are among the homeowners now enjoying high equity, what can you do to make the most of it financially? This article will explore your options.
Cash-Out Refinancing
With cash-out refinancing, you replace your current mortgage loan with a new one that has a higher principal amount than your existing balance. The difference between the two loans goes to you in cash.
The new loan pays off your old mortgage balance and gives you extra money besides. You can use the cash from cash-out refinancing for different purposes, including home improvement, debt consolidation, investment, and more.
One thing to keep in mind is that since you are increasing your mortgage balance, you will also increase the amount of interest you will pay over time. It is, therefore, crucial to get the best refinance rates. You must compare the offerings of different lenders. This becomes even more important because mortgage interest rates have increased and are expected to continue to increase.
As of June 13, Bankrate reported that the 30-year fixed refinancing rate nationwide averaged 5.58 percent while the 15-year fixed refinance rate nationwide averaged 4.74 percent. Both showed an increase from the previous week.
Take steps to increase your credit score if it is not high enough. Also, keep the loan-to-value ratio at 80 percent or lower. These will increase your chances of getting a good deal on cash-out refinancing.
Home Equity Line of Credit (HELOC)
With a HELOC, you can borrow money as you need it, up to the loan limit. The funds are available to you through a credit card or check. You only pay interest on the amount of money you actually borrow, not on the entire line of credit. It usually comes with a variable interest rate.
A HELOC is a good option if you do not have all the cash you need upfront but know that you will need extra funds over time. It is also a good choice if you have several purposes for the money, such as home improvement, debt consolidation, and investment. Take note, though, that some lenders may require you to pay an inactivity fee when you don’t use your line of credit for a certain period.
As with cash-out refinancing, it is important to get the best HELOC rates. Also, you need a high credit score and a loan-to-value ratio of 80 percent or below.
Home Equity Loan
You can also access your home equity by taking out a home equity loan. It is a second mortgage. You borrow a lump sum using your home equity as collateral and repay it over a fixed period at a fixed interest rate. The term of the loan is usually five to 15 years.
A home equity loan may be the better option if you need a large amount of cash upfront and do not plan to borrow more in the future. It is also a good choice if you want the security of knowing what your monthly payments will be because this has fixed monthly payments. Be careful not to borrow more than you need, though, because you will be paying interest on money that you are not using.
As with cash-out refinancing and HELOC, it is important to get the best home equity loan rates. Again, your credit score must be above average and the loan-to-value ratio must not exceed 80 percent.
Selling Your Home
If you do not need the extra cash now or if you do not want to take on more debt, you can also consider selling your home. With the equity you have built up, you may be able to buy a new home and still have money left over.
This may be a good option if you are downsizing, moving to another area, or otherwise do not want to keep your current home. It is also a good choice if you do not want the hassle and expense of maintaining a second property.
Maximize Your Home Equity
Now that you know the different options available to you, it is time to decide which one is best for you. Keep in mind that each option has its own benefits and drawbacks, so make sure to weigh your choices carefully.
Talk to lenders about interest rates and fees, and be sure to consult with an accountant or financial planner before making any decisions. Make sure you get the most out of your high equity by choosing the best option for you!
Meta title: Best Options for Equity-Rich Homeowners to Consider
meta desc: Now that your home has earned high equity, do you know how to make the most of it? Read on to find the best options you can conside
