As Refi Loans Decline, Equity Lines of Credit Rise

Refinancing has allowed homeowners to tap into built-up equity. If interest rates rise, however, a Home Equity Line of Credit (HELOC) may make more sense.

SARASOTA, Fla. – With loan costs rising to their highest levels in more than two years, time may have run out on many homeowners thinking about refinancing. But some may still be able to find some money in the equity they’ve built up in their homes.

According to the latest tabulation from data company Black Knight, more than 5 million owners are no longer good candidates for refinancing because mortgage rates have shot up in recent weeks.

As of this writing, the Freddie Mac rate on 30-year fixed loans was 3.75%, the highest in what seems like ages.

Still, by Black Knight’s count, that leaves about 5.9 million borrowers who can shave at least 0.75% off their current rate. (The company defines a good prospect for refinancing as someone with a credit score of at least 720, who owes less than 80% of their current home’s value.) In aggregate, refinancing could save those homeowners an average of $275 a month – though a lucky handful could save more than $700.

But there are other ways to skin this cat, especially for those who don’t meet the above criteria. We’re talking home equity loans and home equity lines of credit, both of which can be used to unlock the value that’s been built up in your place since you bought it. Combine those paper gains with however much you’ve paid down on the balance of your mortgage over that time and you probably have a pretty decent nest egg to tap.

Equity is the difference between what your house is worth and what you still owe on your mortgage. Of course, more recent buyers haven’t built up as much equity as those who have been in place for a while. Even so, over the previous 12 months, CoreLogic reports that the typical owner gained $56,700 in equity.

Longer-tenured owners did even better. According to the National Association of Realtors, someone who purchased an existing house 10 years ago at the median sales price of $169,000 would have picked up an average of $225,000 in equity if the place sold at $363,100, the median as of last year’s third quarter. The gain comes from $193,600 in appreciation and $31,300 in principal payments.

Over a five-year period, this same owner would have gained $144,500 in equity: $121,800 from appreciation and $22,700 from principal payments. NAR didn’t compute figures for just one year of ownership. But housing prices have leaped nearly 20% in the last 12 months by some estimates, so you do the math.

To get to that money, consider either a home equity loan or a home equity line of credit. They sound alike, but they’re somewhat different.

With a loan, you get a lump sum at closing based on a percentage of how much equity you can borrow against – typically 70% to 80%. The rate is fixed, and you have to start making payments immediately.

With a line of credit, you can take the proceeds any way you like: all at once, in one lump sum sometime down the road, or in various amounts as you need it. You won’t have to make payments until you actually receive some money. But the rate is variable, so the amount you pay could change, even if you don’t take any more money.

These loans aren’t cheap, with rates currently bumping up against 6% and still rising. But since they are secured by your house, they’re often less expensive than other choices. As LendingTree Senior Economic Analyst Jacob Channel points out, “They’re still likely to have relatively low interest when compared to other loan types, like personal loans or credit cards.”

Like any other second mortgage, the proceeds from equity loans can be used for anything you like: home improvements, debt consolidation, wedding expenses or an around-the-world bucket-list trip.

Making home improvements is the main reason people seek these products, according to a recent LendingTree study. About one-fourth aim to consolidate their debt, and about 1 in 10 intend to invest the money. But going on a long-awaited journey is not necessarily a good idea.

“Home equity loans are incredibly versatile” for people who need cash right away, says Channel. But “it’s never a good idea to flippantly borrow money, and anyone who considers a home equity loan should fully understand the risks associated with them before they rush out and get one.”

Meanwhile, seniors have a third way to access their house-based bank accounts: reverse mortgages. And according to the National Reverse Mortgage Lenders Association, they have plenty of dough stashed away in their homes. Senior housing wealth grew by 4% – or $396 billion – in the third quarter or 2021, to a record $10.19 trillion, the trade group reported recently.

Available to owners who are 62 and older, reverse mortgages allow seniors to borrow against the equity in their homes without having to make monthly principal or interest payments. Funds are advanced to the borrower and interest accrues, but neither the outstanding balance nor interest is due until the last borrower leaves the home, whether by selling or passing away.

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