Thanks to rising home prices, homeowners now have more than $32 trillion in home equity as of the first quarter of 2024, according to Federal Reserve Bank of St. Louis — all-time high.
“It’s one of the very few things we can say about today’s housing market that is, more or less, positive,” said Jacob Channel, senior financial analyst at LendingTree.
While the average borrower has about $214,000 in callable equity, 60% of homeowners have at least $100,000also found Intercontinental Exchange’s Mortgage Monitor. Pushable funds are the amount most lenders will allow you to take down while still leaving 20% at home as a cushion.
Rising home prices “continued to build the fortunes of existing owners, pushing available equity to an all-time high,” said Andy Walden, vice president of research and analysis at Intercontinental Exchange.
How to leverage your home for cash
Although homeowners have record housing wealth, the cost of borrowing against your home is also near the highest it’s been in years, largely due to a series of rate hikes by the Federal Reserve, according to Greg McBride, chief financial analyst. at Bankrate.com.
High interest rates make access to home equity more difficult.
“There’s a long-standing sense that it’s a cheap source of capital, but that paradigm has changed,” McBride said.
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In the wake of the pandemic, many existing homeowners refinanced their mortgage when interest rates hit rock bottom and pocketed the difference as a lump sum.
Currently, with mortgage rates hovering around 6.3%, fewer homeowners have the opportunity to do a cash-out refinance.
“As interest rates come down, you may see more opportunities for a cash-out refi, but nobody is going to confuse that with 2021,” McBride said, referring to the period of “extremely low” interest rates after the Fed cut the benchmark of close to zero.
And yet, some homeowners are already more willing to refinance now that mortgage rates have come down from recent highs — as of last reading, demand for mortgage refinancing is more than 100% higher than it was a time.
Alternatively, a home equity loan is a type of second mortgage, which allows borrowers to draw cash while using the home as collateral. In this case, the loan comes as a lump sum with a fixed interest rate.
“A home equity loan could be a good option for homeowners who want to raise money to pay for renovations, either to make the home more to their liking, or to fix it up before selling the home next year. time,” said Holden Lewis, home and mortgage expert at NerdWallet.
However, the current average mortgage rate is 8.52%. according to at Bankrate, notably higher than a 30-year fixed-rate mortgage.
And in this case, “elevated interest rates contributed to homeowners’ reluctance to take out fixed-rate mortgages,” Lewis said, “but some of that concern will melt away as interest rates fall.”
Alternatively, a home equity line of credit, also known as a HELOC, allows you to borrow money against a portion of your home’s equity. Instead of taking out a mortgage for a fixed amount, a HELOC is a revolving line of credit — but with better interest rates than a credit card — that you can use when you want or just have it on hand.
The average HELOC interest rate is just 10%, according to Bankrate. While these rates are high compared to a typical mortgage or home equity loan, they are significantly lower than what it costs to borrow with credit cards, which charge more than 20% on average.
Consider the terms, rates and risks
Of course, different lenders will also offer different terms and interest rates, according to LendingTree’s Channel.
Channel recommends talking to several mortgage companies or loan officers and weighing all the costs before deciding which course of action makes the most sense.
When it comes to borrowing against your home, the interest rate and terms of a loan aren’t the only considerations, he added. There are also risks associated with using your home for cash.
“Defaulting on a mortgage can have serious negative consequences,” Channel said.
Chief among them is that failure to repay a mortgage can lead to foreclosure, he said. Even if it doesn’t, it can ruin your credit and otherwise make it much harder for you to get approved for another loan — regardless of the type.
“The best advice is to be thorough and plan ahead,” Channel said. “Make sure you’re in a position that whatever you borrow, you’re going to be able to pay it back. It’s not one of those things you should try to support.”
