How to tap into your home’s equity if you aren’t ready to sell

Over the past decade, skyrocketing house prices have created significant wealth for the middle class.

Total residential property grew by $8.2 trillion between 2010 and 2020, according to a March report from the National Association of Realtors. The housing boom of the coronavirus pandemic adds even more value to homes.

But unless people plan to sell their home – which can be a difficult feat in a hot housing market – there are only a few ways to tap into that increased equity.

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“You can’t eat your equity, but if you can make some money off of it to reduce debt and make life easy,” says Dennis Nolte, a certified financial planner. from a cash flow perspective, that makes a lot of sense in most situations,” said Dennis Nolte, a certified financial planner and vice president at Seacoast Bank in Winter Park, Florida.

Here’s what financial experts recommend.

Cash refinancing

One way to get money from increasing the value of your home is to refinance. By using cash out refinances, you can also add some liquidity to your savings or put the money into another goal.

Here’s how it works: You refinance your home with a larger mortgage than you paid up front to get back the difference in cash. In some cases, it can be a win-win situation – if you can refinance at a lower rate or reduce your monthly payments.

However, it may not be the best option for homeowners right now. That’s because interest rates are rising rapidly, and with them, mortgage rates. That reduces the chance that someone can refinance now for a more attractive rate.

Jackie Frommer, managing director of lending at the financial services firm, said: “Interest rates have risen so quickly that refinancing at this rate could be twice as high as they are now. “That just doesn’t make sense.”

Refinancing can also be expensive because of additional closing fees.

Home loans

A home loan can help you access some of the appreciated value of your home. It’s a loan that you pay against the value of your home and pay it off over a set period of time, usually 10 to 30 years.

These loans include closing costs and may also include fees. In addition, you pay a lump sum — say, $100,000 — and pay the full amount plus interest. Usually, interest rates are fixed, however, this can help you budget for the long term.

Currently, home loan interest rates typically range from 3% to 12%, depending on the borrower, according to Bankrate.

Home equity credit line

A home equity line of credit, also known as a HELOC, is one of the best ways to access equity in your home without selling it.

Instead of borrowing a fixed amount, HELOC opens up a pool of money that you can use, but you don’t have to take it all at once or use it all. For example, instead of having a $100,000 loan, you might have access to a $100,000 HELOC that you can only withdraw when you need it for something like an emergency repair or renovation.

“You have some money that you can pull out and it doesn’t cost anything unless you use it,” said Thomas Blackburn, chief financial officer of Mason & Associates in Newport News, Virginia. Everyone.

“It’s almost like insurance,” says Nolte, adding that like a life insurance policy, it makes sense to have a HELOC before you need to participate in it.

Currently, interest rates on HELOCs are at a low level. Those with good or excellent credit – generally a FICO score of 670 or higher – can receive HELOC at rates ranging from 3% to 5% according to Bankrate. Those with average scores or below may see rates in the 9% to 10% range.

“Now could be a good time to lock in rates lower as we have seen them move a bit higher and will continue to do so,” said Brittney Castro, CFP at the Mint.

Ways to use home equity

In addition to tapping into your home’s equity to renovate, repair, or expand it, financial advisors also recommend using it to pay off other debts.

This is especially important if you have high-interest credit card debt, says Blackburn. The average rate on credit cards is now more than 16%, according to Bankrate.

“Some people have come to us, they have various forms of debt and are paralyzed trying to find a way to pay it off with high interest rates; meanwhile, their homes have accumulated quite a bit of equity. owned,” he said.

If so, it may make sense to pay off your credit card debt with HELOC or refinance with cash, thus locking in a lower interest rate.

“It’s a beautiful bridge,” Blackburn said.

Of course, this should go hand in hand with a HELOC repayment plan, home loan or cash refinance.

“You want to make sure that you add any payments to your budget and can actually afford it based on everything else you’re working on,” says Castro..

Blackburn said: “It should not be taken lightly; There needs to be a strategy behind it.

Additionally, HELOC typically uses variable interest rates, so over time, the interest rate on the line of credit will increase, Nolte said. While it may still make sense in the short term to use HELOC, it’s important to have an overpayment plan in place before rates rise too much.

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