With higher interest rates discouraging mortgage refinancing, homeowners are looking at the astounding growth in the available equity in their homes to help pay for everything from college costs to kitchen renovations.
According to April's Mortgage Monitor Report by Black Knight Inc., the average borrower now has $207,000 in available equity. Mortgage holders gained $2.8 trillion in tappable equity—a 34% increase over the past year. Even if you plan to stay put, having a lot of equity in your home gives you options.
Home equity is the difference between what you owe on your house and what it is currently worth, explained BOK Financial® Home Loans Product Manager Kurt Morris. Those on the West Coast and mountain states saw the largest annual increases in equity with some increasing more than $100,000. The latest Homeowner Equity Report from CoreLogic reported increases across the BOK Financial footprint:
Increases in home equity through Q1 2022
“During the pandemic, we saw a refinance boom. However, since March 16, the Fed has raised rates four times in an attempt to curb inflation. This caused mortgage rates to rise significantly,” explained Morris. “This decision by The Fed, while good for the overall economy, slowed mortgage refinances but increased the volume of home equity lines of credit and home equity loan applications at BOK Financial.”
Equity options
Before you embark on the journey of tapping into your home equity, work with a mortgage advisor to understand the differences between the three types of home equity options, Morris said.
Home equity line of credit (HELOC)
HELOCs give you access to a line of credit you can tap into as needed for a set duration of time called a draw period. HELOC interest rates are adjustable, meaning you may see increases or decreases over time and the line of credit will show up on your credit report.
Home equity loan
A home equity loan gives you all the proceeds, after closing, in one lump sum. It is sometimes referred to as a second mortgage. You then repay the loan over time with a predictable fixed rate. Repayment periods can vary from five to 30 years.
Cash-out refinance
This option replaces your mortgage with a new one. You use the loan to repay the original mortgage, and the remaining cash is yours to do with as you please.
The record rise in home valuations and the resulting equity is prompting many homeowners to access some of the money they have invested in their homes for a variety of purposes.
Renovate your home
Building a new home office or renovating a kitchen is expensive, and you may not have $20,000 lying around. The most common use of home equity is for renovations through a HELOC.
"In certain cases, interest paid on equity-related loans could be tax deductible," said Morris. "It is always prudent to consult with a tax professional to review your individual tax situation as it relates to your home equity."
Borrowing against your home's equity to improve your space may be worth it, especially if you love your location or moving is out of the question.
Pay down high-interest debt
Anyone with debt knows how frustrating it is to make monthly payments and hardly see your balance decrease. Paying down high-interest debt should be a financial priority, especially the closer you get to retirement, according to Jessi Nippert of BOK Financial Advisors.
The average credit card interest rate is 19.13% for new offers and 15.13% for existing accounts, according to WalletHub's Credit Card Landscape Report.
"A home equity loan or HELOC may offer a lower interest rate than your credit card, making it a better option for paying down or consolidating debt," said Morris.
Finance educational expenses
If you graduated with student loans or are returning to school, you can use your home equity to cover the cost of education for yourself or a family member.
"You'll want to review both the risks and rewards before transitioning from student loans to home equity borrowing options though," said Morris. "Paying off student loans using home equity could provide lower interest rates and reduce the amount you pay overall."
Morris suggests reviewing all federal student loan forgiveness programs you qualify for and how your private student loan rates are structured. Be sure to note that you could lose federal forgiveness opportunities if you consolidate your debt with a home equity loan.
Some private student loans have a variable interest rate, which may be impacted by rising Fed rates. Paying them off with a home equity loan allows you to move to a fixed rate, thereby giving you more stability on monthly payments, even if rates change in the future.
Start a business
If you have a great business idea, but no start-up capital, you may consider using equity you have built in your home to start your own business or cover an existing business expense.
Morris suggests starting by comparing a home equity loan with a small business loan to see which offers more benefits to you. Then, proceed with caution. If your business idea turns out to be more of a Cheetos Lip Balm (yes, that was an actual product) than a Chapstick, you could lose the money and be left with no equity in your home.
Invest in other property
You can also use a cash-out refinance, home equity loan, or HELOC to help you buy another property. The money you get from these home equity options can be used as a down payment on a second home or investment property.
"Secondary home-loan interest rates are higher than primary home rates," said Morris. "Suppose you have enough equity in your primary home to cover the entire cost of your second home. In that case, you can make a cash offer and avoid the higher secondary home rate altogether."
Cover large expenses
Life happens and sometimes you need cash. Morris has seen customers use home equity loan options in all types of situations, including weddings, emergencies and divorce settlements.
"If you have a large purchase, using your home equity may be a better option than racking up credit card bills with high interest," explained Morris.
For example, a HELOC can be opened and only used if needed. A line of credit typically has an open period that extends quite a while–sometimes up to 10 years–before it closes. When you access funds from the line of credit for any purpose during that time period, monthly payments will be required based on the current interest rate.
"As long as it's legal, you can use the money for any purpose—whatever you want or need," said Morris. "Home equity gives you a lot of options."
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