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Now is the right time to tap into your home equity to finance a renovation or make a large purchase. In 2020 the amount of equity that borrowers could take out of their homes was at a record low.
On Tuesday, CNBC reported, that the soaring home prices in the country led to the record level of home equity.
According to data from Black Knight, a mortgage technology and research firm, at the end of 2020, close to 46 million homeowners held a total of $7.3 trillion in equity. Which is the largest amount ever recorded.
This has led to many homeowners considering the home renovation projects by tapping into their equity.
Homeowners looking for a home-equity line of credit, or HELOC, face certain challenges said the last month’s report of The Wall Street Journal.
As the HELOC offers better rates than a credit card it is a good option. According to Bankrate.com. the average interest rate on this type of credit is 4.86% and that of a credit card is 16%.
But in April 2020 during the early days of the COVID-19 pandemic, some banks in the United States of America suspended the origination of HELOCs, including big players like Wells Fargo, JPMorgan Chase, and Citibank.
Many of those suspensions are not lifted yet. The banks offering HELOCs have stricter standards now, so to qualify you might need a high credit score and low debt-to-income ratio.
A cash-out refinance, is another option that lets you draw cash from your home where you can replace your old mortgage with a new refinance.
Compared to home equity loans and mortgages a cash-out refinance will offer you lower rates.
If the cash-out funds are used to make capital improvements then you might also be able to deduct the interest on the first $750,000 of the new mortgage.
When mortgage rates are historically low like the present moment a cash-out refinance is the best option because you’re lowering your interest payment even when you are taking out a bigger mortgage.
According to the Federal Housing Finance Agency, a new federal refinancing program is starting which will reduce your monthly payment by $100 -$250.
Reference Source: Yahoo Finance
