what to do with home equity

Homeowners hit highest equity ever recorded: How to spend your cash

Bethany Ramos Finance, Homeowners, Refinance

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July 13, 2018.

It pays to be a homeowner. Homeowners are breaking records and now collectively share $5.8 trillion in available home equity — the highest number recorded to date. Understanding what home equity means and when and how to use it can make it easier to decide what to do with your cash.

What the heck is home equity? 5 fast facts for homeowners

According to Black Knight, Inc., a provider of mortgage software and analytics, homeowners’ taxable equity increased by over $380 million within the first quarter of this year. This first-quarter data accounts for the largest growth recorded in a single quarter since Black Knight started tracking the metric in 2005.

Compared to last year’s figures:

  • Homeowner equity is up 16.5 percent.
  • The average homeowner has gained $14,700 in available equity.
  • The average homeowner now has $113,900 in tappable equity to cash in on.

So what is home equity? Here are five key facts to remember:

  1. Home equity is the appraised value of a home minus what is owed. If a house was recently appraised at $250,000 and $100,000 is owed on a loan, it leaves $150,000 available in equity. Many lenders require that a borrower keep at least a 20-percent balance (80-percent LTV ratio) as a precaution, or else pay mortgage insurance.
  2. A home with negative equity, also called an “upside down” or “underwater” mortgage, means a homeowner owes more on their mortgage than what their home is worth. Negative equity can occur when a home’s value declines — the opposite of the appreciation seen in today’s market.
  3. A mortgage refinance gives a homeowner access to tappable (available) home equity, replacing an existing mortgage with a new one.
  4. Many homeowners “cash out” their equity with a mortgage refinance, while also making monthly payments more affordable with a better loan term and interest rate. Exchanging mortgages provides the difference in cash, and a standard cash-out mortgage will exceed the original balance by 5 percent or more.
  5. Some homeowners also use home equity to upgrade to a new house before selling another. With a home equity loan, a homeowner can access the extra funds to purchase a new house before closing on their previous home. Typically, homeowners need to have at least 20 percent equity remaining on their mortgage, along with any other funds needed to pay for additional fees attached to the new mortgage.

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What can you do with your equity?

You can get up to 80 percent of your home’s value as cash and use it for any purpose.

Homeowners most often cash in their equity to pay for big-ticket expenses, like:

  • College tuition.
  • Emergency savings.
  • High-interest debt.
  • Home renovation.
  • Investment opportunities.
  • Medical expenses.
  • Special occasions or family vacations.

The Mortgage Bankers Association reported that, according to a 2018 survey, about half of homeowners who take out home equity loans use them to renovate. In the survey conducted on 1,000 homeowners in the U.S. using home equity loans, 52 percent of homeowners said they planned to put their equity toward a home improvement project. Eighty-nine percent of this group said they believed a home reno would increase their property value. And 23 percent of homeowners used their equity to consolidate debt, credit card debt in particular.

While smaller numbers cashed out for an emergency or a vacation, at 8 percent and 2 percent respectively, nearly 84 percent of homeowners felt optimistic that their equity would continue to increase.

Push the payout button and put your equity to use

Tapping into your available home equity can be easy. Yet even as home equity reaches record-breaking volumes, not all homeowners are using it. Homeowners are taking out less money than they have during equity surges of decades past. Many are heeding caution from the 2008 housing market crash. And when they do cash in, they’re opting for cash-out refinances instead of HELOCs.

As the Federal Reserve rate rises with more predicted rate increases within the year, home equity lines of credit, or HELOCs, with variable interest rates are considered risky. A cash-out refinance, in contrast, with a potentially higher but fixed interest rate can be a safer bet. Also, a cash-out refinance isn’t a second mortgage, unlike a HELOC. A cash-out refinance requires only one payment instead of two.

But the real reason homeowners aren’t cashing out yet may be because they don’t know how much money their home is making, Ben Graboske, Black Knight’s Data & Analytics Executive Vice President, said. “I think the typical American doesn’t have that level of awareness, they’re not probably studying the numbers.”

“Home-price growth has been the primary driver of home-equity wealth creation,” Dr. Frank Nothaft, CoreLogic Chief Economist, stated in a recent press release. Dr. Nothaft estimated that because of a rise in home equity increasing wealth gains, U.S. consumer spending is likely to increase by more than $50 billion within the next two to three years.

If your home’s been making money as the housing market booms, extra funds could be there for the taking. You can learn more about your growing equity and get your questions answered fast. Click here to connect with a local loan officer who will walk you through your options and help you come up with a cash-out plan you’ll be happy with.

For educational purposes only. Please contact a qualified professional for specific guidance.

Sources are deemed reliable but not guaranteed.

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