Last Updated on July 8, 2022 by Luke Feldbrugge
Home values soared during the pandemic. But, homeowners are not selling right now to take advantage of selling high after buying low. Why is this happening? Hint: There’s more to the housing market than what it costs for a home.
Comparatively high mortgage rates and high home prices mean existing U.S. homeowners are locked into historically low rates and are staying put.
At the same time, millions of US homeowners benefit from record amounts of equity built into their homes thanks to the unprecedented rise in home prices. If you are staying put in your home and wondering how you can tap into the cash built into your home, know that there are a number of options available.
First American Financial, chief economist Mark Fleming, says that the market potential for existing-home sales in May fell 2 percent to 5.62 million at a seasonally adjusted annualized rate (SAAR), compared with last month, and is 10.5 percent lower than one year ago.
Why? These homeowners are essentially locked into low, sub-3 percent mortgage rates. Now that rates are rising, there is a financial disincentive to sell their homes and buy a new home at a higher mortgage rate.
During the pandemic, when record low-interest rates drove demand up, the lack of supply worked to drive home prices up. Conversely, the lack of supply, in a high rate environment is keeping the market from finding balance.
According to Fleming, higher rates cool demand but more housing supply is critical to meaningful moderation in house price appreciation. U.S. home prices are up 42% since the start of the pandemic, with the average home having gained almost 9% in value just since the start of 2022. “While rising mortgage rates will continue to cool demand, it will also keep existing homeowners locked into their homes,” concludes Fleming. “You can’t buy what’s not for sale — and existing homeowners have little incentive to relieve the supply pressure, keeping a lid on housing market normalization.”
At the same time, millions of homeowners now have thousands more in equity than they did just a few years ago. If you’re one of them, you may have the opportunity to tap into your home equity to help accomplish your personal or financial goals. According to Black Knight, mortgage holders saw their collective tappable equity – the amount available to borrow against while retaining at least a 20% equity stake in the home – increase by $1.2 trillion in Q1 2022 alone.
The equity that you’ve built up from your home to accomplish financial goals such as paying off credit card bills, paying college tuition, and completing home renovations. You can borrow against it using traditional products like home equity loans, cash-out refinances, or home equity lines of credit.
Home Equity Loans, Lines of Credit and Cash-Out Refinance
And here’s how those different products break down.
Home Equity Loans
Home equity loans draw on the equity in a property as collateral. They involve borrowing a fixed, lump-sum amount. The sum is given directly to the homeowner.
Home Equity Line of Credit (HELOC)
A home equity line of credit also draws on the equity in a property as collateral. But, they establish a credit limit based on the home’s available equity, generally up to 85 percent of its value minus outstanding mortgage balances. Homeowners can draw funds with a credit card for the set length of an established period. The amount monthly due is not permanently fixed like with a home equity loan; minimum monthly payments are required, with an initial period in which payments may be “interest only.”
A cash-out refinance replaces an existing mortgage with a larger one. The difference between the current mortgage’s balance and the new, larger loan in cash is what you use to fund your renovation. Veterans Affairs offers cash-out refinance loans, which allow you to refinance a conventional home loan and take out cash on your home’s equity.
The local mortgage specialists with Homes for Heroes are experts at providing a cash-out refinance for heroes in their communities. If you use a Homes for Heroes mortgage specialist for your cash-out refinance, the lender will save you money by reducing their lender fees. Sign up to speak with the Homes for Heroes mortgage specialist in your area today.
New Alternative Options to Unlock Cash
Some new alternative products, like home equity investment or sharing companies, can help you unlock cash from your home. With a home equity investment company or home equity sharing agreement, homeowners receive an upfront investment of cash in exchange for sharing a percentage of their home’s future appreciation or depreciation.
Unlike the more traditional products, this alternative is not a loan, and no monthly payments are required. Home equity investments allow homeowners to unlock cash from their home who might not qualify for the more traditional products or may not want to take on additional debt or make monthly payments.