Home equity, what to know if you’re tempted to borrow from that
Your home is your greatest investment, and with record increases in home prices, it results in pushing up the amount of equity you have in your home. Homes have skyrocketed within the last few years, but what does that mean to someone who doesn't plan on selling? Have you just sat there and wondered what that means to you, someone who knows that their home has gone up in value, but doesn’t know what to do with that information? After all, if you don’t plan on selling, what does it matter to you if homes have gone up in value? That’s a valid point. However, there is something called home equity. In fact, a lot of homeowners don’t know or even consider it. But, according to CNBC an average mortgage holder has a record $185,000 in equity. A lot of people don’t know that with rising home prices, homeowners can benefit without selling. Let’s talk about that for just a second. What does home equity mean exactly? Investopedia states:
Home equity is the value of a homeowner’s interest in their home. In other words, it is the actual property’s current market value (less any liens that are attached to that property). The amount of equity in a house—or its value—fluctuates over time as more payments are made on the mortgage, and market forces impact the property's current value.
Homeowners, your home is your greatest investment
CNBS mentions the ways that homeowner will use their home equity to buy another home
For some homeowners, the hot market has made it an attractive time to sell. Of course, those same rising prices, as well as high rents, can make it difficult for people to relocate. Many homeowners have instead chosen to draw money from their homes, which they can traditionally do in three ways. That includes so-called cash out refinancing; home equity lines of credit, or HELOCs; and reverse mortgages, often offered through what is called home equity conversion mortgages, or HECMs
With interest rates rising month after month, when we think about buying a home, we often consider style, size, and of course, location. But what about the loan that you receive for your new home? How important is a mortgage rate? Mortgage rates are one of the biggest things to investigate when buying a home, and in this case, it can still prove to be significant with home equity. Many people are taking advantage of the mortgage rates right now with the equity that they have in their homes before the rates go up higher. Rates are expected to climb even more in 2022, however it is still a favorable market to get a loan and maximize your purchasing power, and instead, use equity from their home to buy that property they want.
That has given more home buyers more purchasing power. It also allows homeowners to not be at the mercy of selling their current home to qualify for their next home.
Home equity options for home sellers
Home sellers and home buyers, you don't always have to use your current equity to buy another house. Consider other things with home equity. Consider renovations. CNBC goes on to mention some other very valid points:
Cash out refinances require you to refinance your entire mortgage, which may not be economical for many consumers, as their payments would likely go up. A HELOC may be a better option for someone who is remodeling their bathroom, for example, and needs to borrow only $25,000. While that may have a higher interest rate, the underlying principal on that loan is much lower, Kaul said.
If you are having thoughts of selling but don't feel like you are quite ready, consider pulling some equity from your home and getting that beautiful dream kitchen you have always wanted. Or that bathroom that just screams "makeover". Renovations like these can lead to some of the most and best financial appreciation for your home. And whoever said you have to move, maybe you want to renovate because you want to appreciate your house just a little bit more.
Home improvement projects may also be a reason to tap your home equity, says Charles Sachs, a certified financial planner, and chief investment officer at Kaufman Rossin Wealth in Miami.
“If I add another bedroom and a bathroom and a pool, the value of that is instantly higher than what you can buy for, not to mention the enjoyment that you’ll get along the way,”
Of course, not all renovations can be beneficial for your home. Read my blog, Home renovations that are not benefiting your home value
Of course, these are opinions, whether articles read, blogs, or even friends' suggestions. What's most important is knowledge. And the best way of getting that is to go to a bank that you know and feel comfortable finding out all your options. In some cases, it's wiser not to do anything because rates might be higher than your current mortgage. Ultimately, it is up to you! You do what is best for yourself and consider all things once all information has been gathered.
You may not be in a position to borrow
Greg McBride, chief financial analyst at Bankrate.com mentions something very important when deciding whether to borrow from your home. He addresses that it’s important to remember that lenders typically will want you to maintain a 20% equity stake adding,
By and large, this is not 2005, when you can pull out every last nickel of equity that you have. Just because you have home equity doesn’t mean you can borrow from it
Again, the best thing to do is go to your bank and talk to a professional. Only they will know what options you have and will direct you best based on current rates along with your situation.
If you have ever wondered what a mortgage can cost you a month, click on my website HERE and use the mortgage calculator to understand Purchase & Financing Information. You will be able to put in a sale price, down payment, length of the mortgage, and interest rate. This will give you a better idea of your mortgage amount.
Finally, if buying a home is something that you feel that you are ready for CLICK HERE
Or are you a first-time homebuyer? Have many questions that you would love to ask? CLICK HERE and get some ideas on what to expect for a first-time homebuyer.