CastleRock Communities is building new homes in Kyle, Texas in November 2021.
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The record rise in house prices is also increasing the share of wealth people have in their homes.
For many Americans, this means they can borrow more against what is often their biggest asset.
However, financial experts warn that you should think carefully before taking such a step.
The average mortgage owner currently has about $185,000 in equity to use, which is the amount they can get while keeping 20% equity, according to Black Knight mortgage research.
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The homeowner’s net worth currently totals $9.9 trillion, according to Black Knight. This comes after a 35 percent increase of $2.6 trillion in 2021, the largest annual increase on record, compared to a $1.1 trillion increase in 2020.
For some homeowners, the hot market has made this an attractive time to sell. Of course, the same rising prices, as well as high rents, may make it difficult for people to relocate.
Instead, many homeowners have chosen to receive money from their homes, which they can traditionally do in three ways. This includes what is known as cash refinancing; equity lines of credit or HELC; and reverse mortgages, often offered through so-called home equity mortgages or HECMs.
More homeowners, especially those aged 62 and over, are looking to capitalize on their homes in the current market conditions. study by the Institute of Urban Studies found. The total number of these senior loans increased to 759,000 in 2020 from 647,000 in 2018.
This increase was driven largely by cash refinancing, where a new, larger mortgage replaces the previous one. According to the Urban Institute, the average loan for these transactions rose to $205,000 in 2020, up from $180,000 in 2018.
Borrowing costs are expected to rise as interest rates are raised by the Federal Reserve, which could increase incentives for homeowners to make these deals now.
“As interest rates go up next year, you might see people using more secondary collateral products … to use some of that capital when they need it,” said Karan Kaul, chief scientist at the Center for Housing Finance Policy at City Hall. management. institute.
“People already have a very low rate, and as rates rise, it will not be profitable for most of them to refinance,” Kaul said.
As rates rise, the market could shift from predominantly cash-in refinancing to more HELOCs and mortgage-backed loans in the coming years, he said.
Cashing out refinancing requires you to refinance your entire mortgage, which can be uneconomical for many consumers as their payments are likely to rise. HELOC may be the best option for someone who is remodeling their bathroom, for example, and only needs to borrow $25,000. While it may have a higher interest rate, Kaul said the principal on this loan is much lower.
“This is an individual, personalized calculation that should happen at the household level,” Kaul said.
When deciding whether to take out a home loan, it’s important to remember that lenders usually want you to keep 20% of the equity, said Greg McBride, chief financial analyst at Bankrate.com.
“By and large, this is not 2005 where you can pull out every last dime of capital you have,” McBride said.
“Just because you have net worth doesn’t mean you can borrow from him,” he said.
For people who want to raise money to pay off credit cards or fund home improvement projects, the temptation can still be great.
According to Bankrate, current credit card rates hover around 16%, while mortgage rates are around 4%.
McBride warns against consolidating your credit card debt with a home equity loan as a permanent solution. If the debt is the result of a one-time event, such as a medical bill or a period of unemployment, this can be helpful. But if it’s indicative of your lifestyle, chances are you’ll accumulate a mortgage loan balance anyway.
“If you don’t solve the problem that caused the credit card debt, you just move around in sun loungers on the Titanic,” McBride said.
Aleksandarnakich | E+ | Getty Images
Home improvement projects can also be a reason to use your net worth.
“If I add another bedroom, bathroom, and pool, the value of this will instantly exceed what you can buy for, not to mention the pleasure you will have in the process,” said Charles Sachs, a certified financial planner. and chief investment officer of Kaufman Rossin Wealth in Miami.
He cautions that while some of Sachs’ wealthy clients have used these deals to improve their homes or even invest in higher-yielding investments, these strategies are not for everyone.
According to him, you must be financially savvy and able to take risks.
Moreover, it is impossible to know when there will be an absolute bottom for borrowing. Still, five years from now, we can look back and envy current interest rates, he said.