Homeowners are sitting on a record amount of **home equity**, with **over $32 trillion in total equity** as of the first quarter of 2024, a significant increase driven by rising home prices. While this surge in equity presents an opportunity to tap into home wealth, the cost of borrowing against your home has also risen due to the **Federal Reserve’s rate hikes**. This news explores the implications of this situation for homeowners and sheds light on the various ways to access home equity in today’s market.
Key Takeaways
- Homeowners have reached an all-time high in equity, with **over $32 trillion in combined home equity** as of Q1 2024, driven by rising home prices.
- While this presents an opportunity to access home wealth, **rising interest rates** make borrowing against home equity more expensive.
- Homeowners have several options to tap into their equity, including **cash-out refinancing, home equity loans, and home equity lines of credit (HELOCs)**.
- Despite rising rates, **refinancing activity is up** as mortgage rates fall from recent highs, offering potential benefits for homeowners.
- **HELOCs** offer a revolving line of credit with rates lower than credit cards, making them a potentially advantageous option for borrowers.
- Before accessing home equity, homeowners should **carefully consider the terms, interest rates, and risks involved**. It’s crucial to plan ahead and ensure they can afford to repay any borrowed amount.
How to Tap Your Home for Cash
Homeowners have a few different avenues to access their home equity:
Cash-Out Refinance
A **cash-out refinance** allows homeowners to replace their existing mortgage with a new one at a higher loan amount, pocketing the difference as cash. This strategy was very popular during the period of **low interest rates following the pandemic**, as homeowners could refinance to secure lower rates and obtain a lump sum. However, the current **high interest rates** make this option less attractive for many homeowners.
“As rates come down, you might see more opportunities for a cash-out refi, but nobody is going to confuse it with 2021,” said McBride, referring to the period of “ultra-low” rates after the Fed slashed its benchmark to **near zero**.
Despite the higher rates, some homeowners are showing increased willingness to refinance as mortgage rates fall from their recent highs. **Mortgage refinance demand is over 100% higher than a year ago**, indicating a shift in sentiment.
Home Equity Loans
A **home equity loan**, also known as a **second mortgage**, involves obtaining a loan secured by your home. This type of loan provides a lump sum with a fixed interest rate. Home equity loans can be beneficial for homeowners seeking funds for **renovations, home improvements, or debt consolidation**. However, the current average home equity loan interest rate of **8.52%** is higher than a 30-year fixed-rate mortgage, making it less attractive in the current high-interest-rate environment.
“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,” said Holden Lewis, home and mortgage expert at NerdWallet.
Home Equity Lines of Credit (HELOCs)
A **HELOC** offers homeowners a revolving line of credit secured by their home. Unlike a fixed home equity loan, a HELOC allows homeowners to access funds as needed, up to a pre-determined limit. HELOCs generally have **lower interest rates** than credit cards, making them a potentially advantageous option.
The current average HELOC interest rate is near **10%**, significantly lower than the average credit card interest rate of **over 20%**. While HELOC rates are still higher than traditional mortgages or home loans, they can be a more affordable alternative for borrowers needing flexibility and access to funds.
Factor in the Terms, Rates, and Risks
While home equity offers a potential source of funds, it’s crucial to carefully consider the terms, rates, and risks involved before borrowing against your home.
Compare Lenders and Rates
Each lender will offer different terms and interest rates, so it’s essential to **compare options from multiple providers**. Shopping around and obtaining quotes from various mortgage companies or loan officers can help you secure the most favorable terms and rates.
Understand the Risks
Remember, **defaulting on a home equity loan can have significant negative consequences**, potentially leading to **foreclosure** or negatively impacting your credit score. A compromised credit score can hinder your ability to obtain future loans, making it crucial to only borrow an amount that you can comfortably repay.
Plan Ahead
Before accessing home equity, create a **solid financial plan**. Carefully consider your financial situation, the purpose of the loan, and your ability to repay the borrowed amount. It’s advisable to consult with a financial advisor to ensure you make informed decisions and avoid potential pitfalls.
