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Even when the mortgage rates are low, the rise in home prices is making the properties out of reach.
As higher home values are hurting the buyers, they’re a boon for existing homeowners. According to data from Black Knight – as of the third quarter of 2021, home equity among property owners rose to $9.4 trillion. That is an average of $178,000 per borrower and a 32% increase from the same time in 2020.
There are several ways one can borrow against their home equity.
Take a home equity loan
When a borrower borrows a lump sum amount of money and pays it off in equal installments over time it is a home equity loan. Home equity loans usually have fixed interest rates, so the monthly payments are predictable.
Many borrowers can also use these loans to finance their home improvements or repairs.
A lower interest rate on a home equity loan is much better than other types of financing, like a personal loan. But default on home equity loan payments could put the borrower at risk of losing their home.
A HELOC
A HELOC, or home equity line of credit, gives the homeowner access to a sum of money they can draw for 5 to 10 years.
Because the homeowner can apply for a higher sum and only borrow the amount they actually need, the HELOCs are more flexible than home equity loans.
But HELOC interest usually is variable, so once the borrower starts paying back for HELOC, the amount they owe each month could change over time.
Like home equity loans, HELOCs let the borrower borrow for any purpose. And it’s equally important to keep up with HELOC payments because the home is used as collateral for the money borrowed.
A cash-out refinance
Another such option is a cash-out refinance, where the borrower can borrow more than their remaining loan balance and use the extra cash for any purpose.
Then, they can repay the total amount like a regular mortgage.
A cash-out refinance can be a very affordable borrowing option because right now refinance rates are very low.
Higher home equity levels could be an ideal option for those struggling to keep up with their housing costs.
They can easily sell off their properties, or downsize or relocate and live mortgage-free.
Reference Source: Nasdaq
