Whether it’s a kitchen remodel or a dedicated workspace, after a year of living, most homeowners have at least considered the idea of a home improvement project.
Still, anyone who has tried to dip into their house for cash might be surprised.
Soaring home prices have resulted in a record amount of available equity. At the end of last year, about 46 million homeowners held a total of $7.3 trillion in equity to tap into, the highest amount on record, according to Black Knight, a mortgage research and technology firm. .
However, it is not always easy to access this money. Since the start of the coronavirus pandemic, several major banks have stopped offering home equity lines of credit altogether to reduce their exposure — or risk — during times of economic uncertainty.
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Until last year, a HELOC, which is a revolving line of credit but with better rates than a credit card, was a popular way to borrow against the equity you’ve accumulated in your home.
The average interest rate on this type of credit is 4.86%, according to Bankrate.com. Meanwhile, credit cards charge almost 16%, on average.
Some banks still offer this option, although most have tightened their standards, at least somewhat. This means homeowners must have higher credit scores and lower debt ratios.
“Generally, the higher your credit score, the easier it will be to access the equity in your property,” said LendingTree chief economist Tendayi Kapfidze.
There is, however, a better way to free up some of that money, he added.
“Because interest rates are so low, your best bet will be cash refinancing,” Kapfidze said. “Rates are lower than a home loan and lower than your current mortgage rate.”
Homeowners may also be able to deduct interest on the first $750,000 of the new mortgage if withdrawal funds are used to make capital improvements (although fewer people are detailing now, most households won’t benefit of this radiation).
This works well when mortgage rates drop because even if you refinance your current mortgage and take out a larger mortgage, you’re reducing your interest payment at the same time.
Currently, mortgage rates are close to historic lows.
“Since the last peak in April, mortgage rates have fallen nearly a quarter of a percent and have remained below 3% for the past month,” Sam Khater, chief economist at Freddie Mac, said in a recent statement. .
“Low rates offer homeowners the opportunity to lower their monthly refinance payment and our most recent research shows that many borrowers, especially black and Hispanic borrowers, who might benefit from refinancing, are still not pursuing this option. “, Khater said.
Indeed, the federal government is launching a new refinancing program aimed specifically at homeowners who have not taken advantage of low interest rates to refinance their mortgage.
“If you haven’t looked at interest rates in the past year, now would be a great time to check this out,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York.
On a 30-year mortgage, rates below 3% are still widely available. “Even those who received fairly low rates now find themselves refinancing at lower rates,” Boneparth said.
Of course, there are also some limitations for cash refinances.
To start, most lenders will require that you keep at least 20% of your home’s equity, if not more, as a cushion in case house prices drop.
And again, as the industry as a whole has tightened access to mortgages amid the pandemic, some banks have also stopped offering these loans.
“It’s not 2005, you can’t withdraw every penny you have in your home,” said Greg McBride, chief financial analyst at Bankrate.com.
Still, the most preferable terms go to borrowers with high credit scores. “Most people have decent credit, but the best rates go to those with 740 or more,” McBride said.
Finally, refinancing opportunities could be short-lived. Mortgage rates won’t stay low forever, especially as inflation rises.
“That should add some urgency to getting a refinance done sooner rather than later,” McBride said. “The economy is heating up – these are the conditions that are producing higher mortgage rates.”