Unlocking the Power of Home Equity: Strategies for Maximizing Gains

If you are a homeowner, you are likely aware of the remarkable surge in home prices prompted by the COVID-19 pandemic. In fact, did you know that homeowners in the United States now possess approximately $23 trillion in home equity, having gained $2.7 trillion in equity this year?

How Did This Phenomenon Occur?

To put it briefly, home equity represents the current market value of your home minus the amount you still owe. Numerous avenues exist for accessing and benefiting from this equity. The gains observed this year are a result of a bond-buying initiative established to bolster the economy amidst the coronavirus pandemic. This program led to a decrease in mortgage rates, making financing more affordable. Consequently, borrowers have been able to qualify for larger mortgages.

What Does This Mean for Me?

As the government prepares to scale back its bond-buying program, mortgage rates are starting to rise again. Nevertheless, given that home prices are still skyrocketing at a pace not seen in over four decades, it is possible that you have more equity in your home than you realize. Here are a few simple ways to utilize your equity to your advantage.

Cash-Out Refinance

Fannie Mae's forecast indicates that home prices increased by 17 percent in 2021 compared to the previous year. Although the pace of increase is expected to slow in the upcoming year, the impact extends beyond just the homes currently on the market. Cash-out refinances, which involve obtaining new loans resulting in a lump-sum payout to homeowners, rose by 33% in late 2021 when compared to the previous year. With a cash-out refinance, borrowers secure a new loan amount that exceeds their existing loan balance. During the closing process, they receive the difference between the new loan amount and their current loan balance. Traditionally, it has been recommended to refinance if you can reduce your interest rate by at least 2%. However, some lenders argue that even a 1% savings is a significant enough incentive to consider refinancing your home.

Home Equity Line of Credit (HELOC)

If you require access to cash for emergencies or a planned one-time expense, you might consider leveraging the equity you have accumulated to obtain a HELOC loan. HELOCs are secured against the value of your home equity and function as a revolving source of funds. If you qualify, the lender will disburse the total amount either as a lump sum check or via direct deposit. Subsequently, you will have two monthly mortgage payments on your home for an average period of 10-15 years. Most HELOC products utilize a formula to determine the maximum borrowing amount, usually upwards of 80 percent of the home's appraised value after subtracting your existing mortgage.

Convert Home Equity into Retirement Savings

Homeowners aged 62 and older may wish to convert their home equity into funds for retirement. Home Equity Conversion Mortgages (HECMs) enable eligible borrowers to tap into the equity they have accumulated over the years and transform it into funds for living expenses, medical bills, or home improvement projects. Unlike a conventional mortgage that entails regular payments to a lender, a reverse mortgage does not require monthly payments. Instead, the equity is converted into cash, which can be received either monthly or as a lump sum.

What Other Key Information Should I Consider?

Equity can also prove valuable if you need to relocate quickly. By utilizing a cross-collateral loan, you can use the equity in your current home as a down payment for a new property. In a competitive real estate market, cross-collateral loans are a useful tool to help you attain your dream home while either selling or renting out your existing property. Ready to invest in your future? Home equity is an excellent avenue to pursue for long-term financial success. Contact a Mortgage Advisor at Crosscountry Mortgage today to take a confident step forward in your homebuying journey.