How to Make the Most of Home Equity Cash
Currently, there is a huge amount of untapped cash that is hiding as home equity in this country.
Specifically, there is 5.8 trillion in untapped equity in homes throughout the United States of America. In just the past year, the average equity available is $14,700, with the current draw available of $113,000.
The reality is homeowners in the United States of America are getting wealthier all the time; however, in this climate, they're much less likely to tap into this equity than at any other time in real estate history. Home values are still rising; but, people are taking less and less out of home equity, and we see much fewer home equity lines of credit.
To figure out the tappable amount of wealth, you take the appraised value of the home minus 20%, Which is what most lenders will require borrowers to produce to have a safety net on an equity loan. In the first quarter of last year, this amount grew by 7% when compared to previous quarters.
Black Knight mortgage software and analytics company says that this is the single largest growth since the company began tracking in 2005 and is also up 16.5% when compared to just one year ago.
What it does reveal is it there is now 5.8 trillion dollars in untapped equity in the market. This is a huge volume and the highest ever recorded, With the average mortgage holder having $14,700 in usable equity over the past year.
However, variable interest rate mortgages are much riskier because of the variations in the interest rate. Most Americans shy away from variable-rate interest rates for a good reason; there’s too much uncertainty in the market, which creates uncertainty in their personal finances and their life in general.
80% of this equity lands in the laps of homeowners whose interest rate is below 4.5%, putting them in an excellent financial situation. And 60% of it is held by people with below 4% interest rates. In today's marketplace, the average rate on a 30-year fixed mortgage is around 4.8%.
What's going on is the homeowners who are using the equity in their homes are doing it through cash-out refinances instead of equity loans. Even though these are done at a higher interest rate, it's still safer in the long haul for the consumer. Yet, only 1.17% of what was available was used in the last first quarter which is the lowest in over four years.
The truth is, at least in speculation, many Americans may not know how much equity they have in their homes because they probably don't sit around and study the numbers. Also, there are fears among the average consumer that there will be a repeat of 2008; they don't want to be on the wrong side of that if another bubble occurs.
With the pain of the housing crash that happened over ten years ago still in the hearts of many, most consumers are very leery of tapping into their equity and using it like an ATM, which is the way millions of us were doing it before the bubble of 2008. So many people lost their homes to foreclosure, and many families were destroyed.
The homeowners of today were children in the 2008 crash and watched their parents lose their homes, and they're very determined not to put themselves, or their families and children through the same horror.
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In reality, consumer expectations of home price growth have declined in the last 12 months. Consumers expressed high optimism about the potential direction of their financial situations and the economy in general over the previous year.
There are two keys to help you use your home equity to your financial advantage.
Key #1 - If you have good credit, you can use the equity in your home to refinance to get a much lower interest rate; this means you will pay less money every month and less money in the long term of the loan.
Key #2 - One way you can do this is you can receive an instant advance, have a huge lump sum of money and use the home equity as your collateral. This will be set up over a fixed amount of time with a fixed interest rate. You can be required to make payments every month.
You can also do what is called a home equity line of credit, which operates as an open-ended loan, somewhat like a credit card. You only use it when you need it, but it goes against the equity in your home. Unfortunately, with a loan like this, the rates are often variable, and your payments will change with interest rate changes.
Deciding which one is best for you just comes down to your personal needs and financial situation. You get the advantage of a secured fixed rate and a fixed payment every month when you used a large lump sum amount and take it all at once. However, you get much more flexibility when you get a line of credit, but then you have to deal with the variable interest rate and the variable payments.
The bottom line is, it's crucial that you use this money wisely. When you do a home equity interest loan, you're putting your family's home up as collateral; it’s very important that you understand that. Because of the way this works, you're putting yourself at high risk if you overspend and cannot make the payments; that’s why it's vital as you begin this process by being clear about why you need the money and not use it as an open-ended ATM.
Any debt that you take on should be used to improve your financial situation or to cover an extremely necessary or emergency purchase that potentially has a lasting value at least as long as the amount of time it would take you to pay back the loan. If you are considering using a home equity loan for vacations, gifts, or spur-of-the-moment purchases, those a probably not a wise use of a loan.
One excellent use of a home equity loan is to consolidate your high-interest rate debt. Taking multiple balances from credit cards, old loans, or car loans oh, and making them one payment, and lowering your overall interest rate is a great financial plan. However, you must have the discipline to make this work. It's very easy to rack up those credit cards again and end up putting yourself in an even worse situation.
Another great use of your home equity money could be making improvements to your home. It's important before you begin this process to be clear about how long you intend to stay in this home to make sure that you obtain the benefits of this type of investment. The truth is this type of investment will make your home more valuable and increase your Equity down the road, but you must be sure you're going to be around to reap those benefits.
Another solid use of equity money is to cover education, as in college for your children. Before you reach out for your home equity money, it's important you take a look at any federally sponsored programs that may be available to you at that time. You can deduct up to $2,500 in interest from student loans depending, of course, on your income. Still, you must balance debt against your own personal financial needs for security and retirement.
Have a Plan
In today's uncertain economy and market, it's very important to take your time and have a well-defined plan for using any money that you take out on the equity of your home. Your home is your biggest chance to gain wealth you'll have in your lifetime and will probably be the largest single purchase you'll ever make in your lifetime. If you take out equity money and squander that money, I could put you in a hole that you cannot get out of, at which time you may be facing eviction.
To avoid the situation, make sure you have a need that fits one of the criteria above before you even consider using your home's Equity money toward anything. Also, make sure you choose the right form of equity money, whether it be a lump sum or an open line of credit.
Having a well-defined plan well thought out in advance and implementing that plan is your best bet to use your equity money to help improve your financial situation now and in the future. Use the keys we've listed above and work with a financial planner if needed to make sure that you implement your plan properly; it could be one of the best decisions you make in your entire life.