How to use your home for cash as equity in the home reaches a record

Whether it is a kitchen renovation or a special workplace, after a year of living, most homeowners have at least enjoyed the idea of ​​a home renovation project.

However, anyone who has tried to get their home for cash may be faced with a surprise.

Rising house prices have led to record home equity. By the end of last year, some 46 million homeowners had a total of $ 7.3 trillion in equity to use, the largest amount ever recorded, according to Black Knight, a mortgage technology and research firm.

However, accessing this money is not always easy. Since the onset of the coronavirus pandemic, several large banks have stopped offering equity lines of credit to reduce their exposure – or risk – to uncertain economic times.

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Until last year, a HELOC, which is a revolving credit line but with better interest rates than a credit card, was a popular way to lend to the equity you have accumulated in your home.

The average interest rate on this type of loan is 4.86%, according to Bankrate.com. Credit cards, meanwhile, charge almost 16%, on average.

Some banks still offer this option, although most have tightened their standards, at least somewhat. This means that homeowners need to have higher credit scores and lower debt-to-income ratios.

“In general, the higher your credit score, the easier it will be to access equity,” said Tendayi Kapfidze, chief economist at LendingTree.

There is, however, a better way to free up some of that money, he added.

“Because interest rates are so low, your best bet will be refinancing by redemption,” Kapfidze said. “Interest rates are lower than a mortgage rate and lower than the current mortgage rate.”

Homeowners may also be able to deduct interest on the first $ 750,000 of the new mortgage if the redemption funds are used for capital improvements (although because fewer people now report in detail, most households will not benefit from this write-off).

This works well when mortgage rates fall, because even though you are refinancing your current mortgage and taking out a bigger mortgage, you are reducing your interest payments at the same time.

Currently, mortgage rates are close to record lows.

“Since the most recent peak in April, mortgage rates have fallen by almost a quarter and remained below 3% last month,” said Sam Khater, chief economist at Freddie Mac, in a recent statement.

“Low interest rates offer homeowners the opportunity to reduce their monthly refinancing payments, and our latest research shows that many borrowers, especially black and Hispanic borrowers, who could benefit from refinancing, still do not choose to refinance.” “, said Khater.

In fact, the federal government is launching a new refinancing program aimed specifically at homeowners who have not taken advantage of low interest rates to repay their mortgage.

“If you weren’t looking at interest rates last year, now would be a good time to check it out,” said Douglas Boneparth, a certified financial planner and president of Bone Fide Wealth in New York.

On a 30-year mortgage, interest rates below 3% are still widely available. “Even those who received fairly low interest rates are refinancing at lower interest rates today,” said Boneparth.

It’s not 2005, you can not extract the last nickel you have at home.

Greg McBride

Chief Financial Analyst at Bankrate.com

Sure, there are some restrictions on redemption refinancing, too.

For starters this is a great way to get word out that most lenders will need to keep at least 20% of your home equity, if not more, in the event of a fall in house prices.

Again, as the entire industry increased access to mortgages amid the pandemic, some banks also stopped offering these loans altogether.

“It’s not 2005, you can not get the last nickel out of your house,” said Greg McBride, chief financial analyst at Bankrate.com.

However, the most preferred terms go to borrowers with high credit scores. “Most people have pretty good credit, but the best rates go to those with 740 or higher,” McBride said.

Finally, refinancing opportunities could be short-lived. Mortgage rates will not stay low forever, especially as inflation rises.

“This should add some urgency to refinancing sooner rather than later,” McBride said. “The economy is heating up – these are the conditions that produce higher mortgage rates.”

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