Cultura Rm Exclusive/twinpix | Image source | Getty Images
Home equity is near an all-time high. However, financial advisors say it could be difficult to tap due to high interest rates.
Total home equity for U.S. mortgage holders rose to more than $17 trillion in the first quarter of 2024, just shy of the record set in the third quarter of 2023, according to new data from CoreLogic.
According to CoreLogic, the average equity per borrower increased by $28,000 compared to last year, totaling about $305,000. Chief economist Selma Hepp said that was a nearly 70% increase from $182,000 before the Covid-19 pandemic.
About 60% of homeowners have a mortgage. Your equity is the value of the house minus any outstanding debts. Total Home Equity for US Homeowners with and without a mortgage is $34 trillion.
The increase in home equity is largely due to an increase in home prices, Hepp said.
Many people also refinanced their mortgage earlier in the pandemic when interest rates were “really, really low,” potentially allowing them to pay off their debt more quickly, she said.
“The people who owned their homes at least four or five years ago feel fat and happy on paper,” said Lee Baker, founder, owner and president of Apex Financial Services in Atlanta.
But Baker, a certified financial planner and member of the CNBC Advisory Council, as well as other financial advisors said access to these assets is complicated by high borrowing costs.
“Some options that may have been attractive two years ago are no longer attractive now because interest rates have risen so much,” said CFP Kamila Elliott, co-founder of Collective Wealth Partners and also a member of CNBC’s Advisor Council.
Still, there may be some cases where it makes sense, consultants say. Here are some options.
Home equity line of credit
Grace Cary | moment | Getty Images
A home equity line of credit (HELOC) is typically the most common way to tap real estate assets, Hepp said.
A HELOC allows homeowners to borrow against their home equity, usually for a set term. Borrowers pay interest on the outstanding balance.
According to Bankrate data as of June 6, the average HELOC interest rate is 9.2%. Interest rates are variable, meaning they can change, unlike fixed-rate debt. (Homeowners may also consider a home equity loan, which typically comes with fixed interest rates.)
For comparison, according to Freddie Mac, interest rates for a 30-year fixed-rate mortgage are around 7%.
More from Personal Finance:
Buy a house made famous by Home Alone or John Lennon? Expect a reward
A down payment of 20% is “definitely not necessary” to purchase the house.
What to expect from the real estate market this year
While HELOC interest rates are high compared to a typical mortgage, they are much lower than credit card interest rates, Elliott said. Credit card holders with a balance have an average interest rate of about 23%, according to the Federal Reserve.
According to Bank of America, borrowers can generally borrow up to 85% of their home value, minus any outstanding debt.
Homeowners can use a HELOC to pay off their outstanding high-interest credit card debt, Elliott said. However, you’ll need to have a “very focused plan” to pay off the HELOC as quickly as possible, ideally within a year or two, she added.
The people who owned their homes at least four or five years ago feel fat and happy on paper.
Lee Baker
certified financial planner
In other words, don’t just pay the minimum monthly debt payment — which might be tempting since those minimum payments would likely be lower than those on a credit card, she said.
Likewise, homeowners who need to make home repairs or improvements can turn to a HELOC instead of using a credit card, Elliott explained. This could have an additional benefit: Those who itemize their taxes may be able to deduct their loan interest on their tax return, she added.
Reverse Mortgage
A reverse mortgage is a way for older Americans to tap into their home equity.
Like a HELOC, a reverse mortgage is a loan against your home. However, borrowers do not repay the loan every month: the remaining amount grows over time due to accrued interest and fees.
A reverse mortgage is probably best suited for people who have a majority of their assets invested in their home, advisers say.
“If you were late to get the ball rolling when you retire [savings]“It’s another potential source of retirement income,” Baker said.
According to the Consumer Financial Protection Bureau, a home equity conversion mortgage (HECM) is the most common type of reverse mortgage. It is available to homeowners ages 62 and older.
A reverse mortgage is available as a lump sum, line of credit, or monthly payment. It is a non-recourse loan: if you take steps such as paying property taxes and maintenance costs and use the house as your primary residence, you can stay in the house as long as you want.
Borrowers can typically use up to 60% of their home equity.
According to the CFPB, homeowners or their heirs must eventually repay the loan, usually by selling the home.
While reverse mortgages generally leave heirs with less of an inheritance, this shouldn’t necessarily be viewed as a financial loss to them: Without a reverse mortgage, those heirs might have been paying out of pocket anyway to subsidize the borrower’s retirement income, Elliott said.
Sell your house
Alexander Spatari | moment | Getty Images
Historically, the biggest benefit of home equity has been accumulating more money to put toward a future home, Hepp said.
“This has historically been the way people have been able to move up the property ladder,” she said.
But homeowners with a low, fixed-rate mortgage may feel tied to their current home because of the relatively high interest rates that would come with a new loan on a new home.
A move and downsizing remain an option, but “that math doesn’t really work in their favor,” Baker said.
“Not only has the value of her house gone up, but so has everything else around it,” he added. “If you try to find something new, you can’t do much with it.”
Cash-out refinancing
A cash-out refinance is another option, but should be considered a last resort, Elliott said.
“I don’t know anyone who recommends a cash-out refi company right now,” she said.
A cash-out refinance replaces your existing mortgage with a new, larger one. The borrower would pocket the difference as a lump sum.
To give a simple example: Let’s say a borrower has a home worth $500,000 and an outstanding mortgage of $300,000. You could refinance a $400,000 mortgage and receive the $100,000 difference in cash.
Of course, they would likely refinance at a higher interest rate, meaning their monthly payments would likely be much higher than their existing mortgage, Elliott said.
“Really dig into the numbers,” Baker said of homeowners’ options. “Because you’re putting a strain on the roof over your head. And that can be a precarious situation.”
Source link
2024-06-10 20:10:39
www.cnbc.com
