by Maurie Backman | June 19, 2021
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Property values have soared this year. And now, homeowners have the potential to benefit from it, even if they aren't selling.
Inflated home prices are keeping a lot of potential buyers out of the housing market. But they're also giving many homeowners a lot more financial flexibility.
Home equity, on a national level, grew by $2 trillion during 2021's first quarter, according to data from CoreLogic. That represents a 20% gain compared to the previous year. When broken down among homeowners with mortgages, that amounts to an average equity gain of $33,400 per borrower.
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Equity is the portion of your home that you own outright, and it's calculated as the difference between what your home can sell for and the balance you owe on your mortgage. If the market value of your home is $400,000 and you owe $300,000 on your mortgage, that leaves you with $100,000 worth of equity.
Having more equity in your home could work to your advantage if you decide to sell. After all, the more equity you have, the more of a profit you stand to walk away with -- something a lot of sellers are realizing in today's market.
But you don't have to sell your home to benefit from the equity you've built in it. You can also borrow against the equity you have in your home, whether via a home equity loan or a home equity line of credit (HELOC).
Both options make it possible to snag a loan at a competitive interest rate, and both are fairly easy to qualify for, since your home is used as collateral to secure the loan itself. Meanwhile, if you need to borrow money and use a credit card or even a personal loan, you might pay a higher interest rate on the amount you borrow.
Another way to benefit from a higher level of home equity is to do a cash-out refinance. With a traditional refinance, you swap your existing mortgage for a new one in the same amount as your remaining home loan balance. With a cash-out refinance, you borrow more than your existing mortgage balance, and you can use your extra cash for any purpose you want. The more home equity you have, the more money you can borrow above your remaining mortgage balance by going this route.
Soaring property values have caused a spike in home equity levels. But higher home values won't last forever.
Right now, home values are extremely inflated because low mortgage rates and limited inventory are driving housing prices up. But once the real estate market settles down and more inventory appears, home values could start to decline. That could leave mortgage borrowers with less equity than they have today.
If you've been thinking of borrowing against your home or doing a cash-out refinance, you may want to act sooner rather than later. Home equity levels can fluctuate, and while they may be very high right now, things could look a lot different by this time next year.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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