Homeowners hold record records. What you need to know if you want to borrow

New Homes Under Construction by CastleRock Communities in Kyle, Texas, November 2021.

Matthew Busch | Bloomberg | Getty Images

Record increases in house prices also increase the amount of shares people hold in their homes.

For many Americans, this means that they can borrow more than what is often their greatest asset.

However, economists warn that you should think carefully before making such a move.

The average mortgage holder currently has approx $ 185,000 in home equity to reach, which is the amount they can access while maintaining a 20% stake, according to a Black Knight mortgage survey.

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Homeowners’ equity now stands at a total of $ 9.9 trillion, according to Black Knight. This comes after a 35% gain in $ 206 worth $ 2.6 trillion in 2021, the largest annual increase ever, surpassing the $ 1.1 trillion increase in 2020.

For some homeowners, the hot market has made it an attractive time to sell. Of course, these same rising prices, as well as high rents, can make it difficult for people to relocate.

Many homeowners have chosen to raise money from their homes, something they can traditionally do in three ways. This includes so-called cash refinancing. equity home credit lines or HELOCs; and reverse mortgages, often offered through what are called home equity conversion mortgages or HECMs.

Most homeowners, especially those aged 62 and over, were willing to take stock from their homes in the midst of current market conditions, research by the Urban Institute were found. The combined number of these loans to seniors increased to 759,000 in 2020, from 647,000 in 2018.

This increase is mainly due to cash refinancing, where a new, larger mortgage loan replaces the previous one. The median loan for these transactions increased to $ 205,000 in 2020, from $ 180,000 in 2018, according to the Urban Institute.

With borrowing costs expected to rise as the Federal Reserve raises interest rates, this may increase the incentive for homeowners to make these transactions now.

“As interest rates rise next year, you could see people using more second-party products … to use some of that capital when they need it,” said Karan Kaul, lead researcher at the Housing Finance Policy Center at Urban. Institute.

“People already have a very low interest rate and as interest rates rise, it will not be economical for most people to refinance,” Kaul said.

Just because you have shares in the house does not mean that you can borrow from it.

Greg McBride

Chief Financial Analyst at Bankrate.com

As interest rates rise, the market may shift from refinancing transactions mainly in cash to more HELOCs and mortgages in the coming years, he said.

Redemption refinancing requires you to refinance your entire mortgage, which may not be economical for many consumers, as their payments are likely to increase. A HELOC may be a better choice for someone renovating their bathroom, for example, who only needs to borrow $ 25,000. While this may have a higher interest rate, the underlying capital on this loan is much lower, Kaul said.

“It’s a personalized, personalized calculation that needs to be done at the household level,” Kaul said.

Retention of equity 20%.

When deciding whether to borrow from your home, it is important to remember that lenders usually want to keep a 20% stake, said Greg McBride, chief financial analyst at Bankrate.com.

“In general, this is not 2005, when you can get the last stock nickel you have,” McBride said.

“Just because you have shares in the house does not mean you can borrow from it,” he said.

For people who want to raise money to pay for credit cards or fund home improvement projects, the temptation can be even greater.

Be careful in debt consolidation

Current credit card interest rates are around 16%, according to Bankrate, while mortgage rates are around 4%.

McBride warns you not to consolidate your credit card debt with a home equity loan as a permanent solution. If the debt was the result of an individual event, such as a medical bill or period of unemployment, it may be helpful. But if it’s indicative of your lifestyle, chances are you will still have a mortgage balance.

“If you have not solved the problem of credit card debt in the beginning, just move to the Titanic sunbeds,” McBride said.

Consider improving your home

Aleksandarnakic | E + | Getty Images

Home improvement projects can also be a reason to use your own funds.

“If I add another bedroom, a bathroom and a swimming pool, their value is immediately greater than what you can buy, not to mention the enjoyment you will have along the way,” said Charles Sachs, a certified financial planner. and Investment Manager at Kaufman Rossin Wealth in Miami.

While some of Sachs’ high net worth customers have sought these deals for housing improvements or even invested in higher-yield investments, these strategies are not for everyone, he warns.

You have to be financially savvy and have the ability to take risks, he said.

In addition, it is impossible to know when will be the absolute bottom for borrowing. However, we may look back in five years and envy current interest rates, he said.

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