How To Get Money Out Of Your Home When Mortgage Rates Rise

American homeowners are wealthy in homes, sitting on a record amount of home equity.

However, taking advantage of all that extra money becomes more difficult as interest rates rise.

The surge in demand for housing over the past year and a half, largely due to the pandemic, has pushed up house prices. The supply was simply not sufficient to meet the demand. Prices are now up almost 20% from a year ago.

As a result, homeowners have gained a massive amount of workable equity – the amount borrowers can typically withdraw from their homes while leaving at least 20% as a cushion. At the end of the third quarter, borrowers had a record $ 9.4 trillion in collectively usable real estate equity, an average of $ 178,000 per borrower, according to Black Knight, a data and analytics firm. mortgage.

This represents a 32% jump from one year to the next.

As available cash increased, borrowers withdrew equity from their homes during the third quarter at the highest rate in 14 years. It was relatively inexpensive for them because mortgage rates were low at the time, with the 30-year average rate pegged at less than 3%, according to Mortgage News Daily.

Today, rates are above 3% and are expected to rise further as the Federal Reserve slows its mortgage-backed bond purchases. As rates rise, refinancing with cash becomes less attractive as many borrowers are expected to refinance at a higher rate than they currently have.

Right now, 24% of all first mortgages have an interest rate of less than 3%, according to Black Knight.

Borrowers can take out a home equity line of credit, which is a second lien, but these usually have variable interest rates, which means they can go up or down. Some lenders will offer shorter fixed terms, but all home equity lines have a drawdown period and a repayment period.

So borrowers can use that line of credit for, say, 10 years, but after that time they have to start paying back the money. They have to pay interest on the money they withdraw during the draw period.

Switching from the drawdown period to the repayment period can also be a shock to the borrowers’ wallet, as they have to pay both interest and principal.

“You have to take the whole picture into account: current amount of debt and associated interest rates, how much you want to borrow, HELOC rate offers versus withdrawal rates, additional debt repayment schedule, etc. . “said Andy Walden, vice president of market research at Black Knight.” To make the best decision, owners need to look at the numbers back and forth and see what makes the most sense for their particular case.

Sometimes it makes sense for borrowers to refinance their primary mortgage with cash, even if the rate they are getting is higher than the rate they currently have.

“If homeowners are looking for a set structure to pay off their debt, like credit cards, it often makes financial sense to take a slightly higher interest rate through cash refinancing to consolidate and eliminate interest immediately. that are often four to five times as much, ”said Matthew Weaver, vice president of CrossCountry Mortgage.

Withdrawing money from the house to invest in something else with a higher yield might also strengthen the case for a slightly higher interest rate. Borrowers should look at the potential risks and returns of this investment, whether it’s stocks, cryptocurrency, or even an investment house, and weigh it against the added cost of debt.

“I would recommend a line of credit when the financial need is short-term and there is a defined plan to pay it off over the next 24-36 months,” Weaver added. “The advantage of a line of credit is that it is flexible with a low initial cost, but the downside is that most have a variable interest rate which will change and likely increase over time.”

Since the financial crisis of 2007-2008, borrowers have been extremely careful when withdrawing money from their homes. Home prices have fallen so much that a large number of borrowers have taken the plunge on their home loans, due to more than property values.

This is unlikely to happen today as mortgage underwriting is much stricter and borrowers have a lot of home equity.

Home prices are also expected to rise next year, but the gain is expected to be smaller than they were this year as more homes hit the market and interest rates rise. Borrowers should be able to safely withdraw money from their homes now, but the more equity cushion they leave in the home, the less risk they take.

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