The housing market has strongly favored sellers in 2021. Limited inventory and low mortgage rates have fueled a surge in buyer demand that's driven home prices upward.
In November, the Federal Housing Finance Agency reported that U.S. home prices rose 18.5% during the third quarter of the year compared to the same period in 2020. Not surprisingly, that's left a lot of property owners with sky-high levels of equity.
In fact, by the end of 2021's third quarter, U.S. homeowners had a collective $9.4 trillion in available equity, according to Black Knight. That amounts to an average of $178,000 per homeowner.
So how can you, as a property owner, take advantage of extraordinarily high home prices? Here are a few options to look at.
When home prices are high, selling at a premium and upsizing is a strategy that doesn't always work. What you gain financially from the sale of your home, you'll lose by paying a small fortune for your next one. But if you're selling your home and downsizing, it's a very different story.
Typically, you'll pay less for a smaller home than a larger one within the same geographic vicinity. And so if you're ready to unload some square footage, you have a prime opportunity to sell your home and potentially buy another one outright without having to take out a mortgage. You may even have enough profit from that sale to build a nice little investment portfolio of stocks, bonds, and real estate investment trusts (REITs).
2. Do a cash-out refinance
You don't need to sell your home to benefit from the fact that it's worth a lot more. Instead, you could do a cash-out refinance.
A cash-out refinance differs from a traditional refinance in that you borrow more than your remaining mortgage balance. The excess cash you get in that transaction can be used for any purpose, whether it's to renovate, pay off existing debt, or invest.
Right now, refinance rates are sitting near historic lows, so it's a great time to swap your existing mortgage for a new one. This especially applies to borrowers with strong credit.
3. Get a home equity loan or HELOC
You may have renovations or repairs you're looking to make that could increase your property's value even more. With home prices -- and home equity levels -- being so high, now's a good time to borrow against your property via a home equity loan or home equity line of credit (HELOC).
A home equity loan is a good bet when you're sure of how much you want to borrow. HELOCs offer more flexibility -- you can apply for a larger credit line than you think you might need and only withdraw the sum you want to borrow -- but they also come with variable interest rates that can make them trickier to pay off. Either way, a home equity loan or HELOC may be your most affordable way to borrow against your equity if you're not looking to go through the process of refinancing.
Take advantage of higher home prices
The home price levels we're seeing today won't last forever. Once more inventory hits the real estate market, we could see a steady decline in home prices. As such, now's the time to take advantage of higher property values, whether it's by downsizing and profiting, doing a cash-out refinance, or borrowing against your home.