Home Equity Levels Have Doubled in Less Than a Decade. 4 Ways to Leverage Yours

Home Equity Levels Have Doubled in Less Than a Decade. 4 Ways to Leverage Yours

Saving for your own home
Given the high level of equity in your home, these equity leveraging options could make a lot of sense.

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In recent years, owners have witnessed a major increase their real estate net worthIn the first quarter of 2017, home equity levels totaled $15.6 trillion nationally, and that figure rose to $32.8 trillion in the first quarter of 2024, an increase of more than 110% in less than a decade.

This remarkable growth can be attributed to a series of factors, such as a robust housing market, periods of low interest rates that have boosted demand, and a limited supply of housing in many areas. Another factor behind this stock boom has been the steady appreciation of home values across the country. As property values ​​have increased, homeowners have seen their net worth increase significantly. Additionally, many homeowners have taken advantage historically low interest rates during the pandemic to refinance their mortgages, allowing them to pay down their principal faster and build equity even faster.

In turn, many owners are considering ways to use home equitywhether for consolidate debtmake improvements or renovations to the home or even build wealth over time. And it can be a smart financial decision, especially in the current economic climate, where interest rates on home equity products can be lower than other forms of borrowing. tap into your home equityHowever, it is important to understand the different options available and determine which one is best for you.

Find out here what the highest home equity loan rates are right now.

Home Equity Levels Have Doubled in Less Than a Decade. 4 Ways to Leverage Yours

There are several ways to access the equity in your home, including:

A home equity line of credit

A Home Equity Line of Credit (HELOC) works similarly to a credit card, with a revolving line of credit which allows you to access the equity in your home. During the HELOC draw periodYou can borrow as needed up to a predetermined limit. You then enter a repayment period, during which you repay the amount borrowed, plus interest.

HELOCs offer the flexibility to borrow only what you need, when you need it, and often come with lower interest rates than credit cards or personal loans. For example, right now, the average HELOC rate The interest rate on a credit card is 9.18% (as of July 18, 2024). This is significantly lower than the average credit card rate, which currently sits above 21%. Additionally, interest on a home equity line of credit may also be tax deductible if used for home improvements.

However, HELOCs typically come with variable interest rates, which can increase over time, potentially resulting in higher payments on the money you borrow. There’s also the risk that if you default, you could face foreclosure, since HELOCs are a type of second mortgage secured by your home.

Get started and explore your home equity loan options online now.

A home equity loan

A home equity loan allows you to access the equity in your home through a lump sum loan that you repay over a set term. This type of home equity borrowing option has a fixed interest rate, which means you’ll have predictable monthly payments, making it easier to budget.

The fixed nature of this borrowing option is ideal for large and one-off expensesand interest rates on home equity loans are often lower than unsecured loans. Currently, the average home equity loan rate is also lower than the average home equity line of credit rate at 8.60%, making it one of the most affordable borrowing options to consider in today’s high-rate environment.

The downside is that these loans are less flexible than HELOCsand closing costs can be substantial depending on how much you borrow. You’ll be adding a second payment to your monthly mortgage obligation, which could put a strain on your budget if you’re not careful — and like a home equity line of credit, you’re using your home as collateral.

Refinancing with withdrawal of funds

When you leverage your home equity with a cash refinancingYou replace your existing mortgage with a new, larger loan and pocket the difference in cash. As with home equity loans and HELOCs, the interest on a cash-out refinance may be tax-deductible if used for home improvements. And, in a normal rate environment, a cash-out refinance can potentially lock in a lower interest rate on your entire mortgage, simplifying your finances with one monthly payment instead of two separate payments.

But that’s generally not the case in the current rate environment, because current mortgage rates Interest rates are significantly higher than they were a few years ago. So if you took out your mortgage when rates were closer to 3%, a cash-out refinance may not make much sense, as it will significantly increase the cost of your mortgage.

A reverse mortgage

Available to owners aged 62 and over, a reverse mortgage allows you to borrow against the equity in your home without having to make additional payments on a new loan each month. Instead, the money you borrow is repaid when you move out and sell the home or after you die.

THE main advantage of a reverse mortgage The advantage of this type of loan is that it can provide you with a steady income during retirement without requiring monthly mortgage payments. It also offers flexibility in how you receive the funds, which can be paid in a lump sum, a line of credit or monthly payments.

However, there are some potential drawbacks to consideralso. For example, you must live in the home to meet the loan requirements. Fees and interest rates can also be high, and the product is complex, making it unsuitable for certain types of homeowners.

The essential

With home equity levels doubling in the last seven years, homeowners have had the opportunity to tap into their home equity in a meaningful way. However, before you tap into your home equity, it’s important to understand which option might be right for you, starting with your financial goals, unique circumstances, and short- and long-term financial plans. By evaluating these factors and fully understanding how to access your home equity, you can make a decision that will help you achieve your financial goals while protecting your most valuable asset.