For US homeowners, it pays to track equity
Are millions of homeowners sitting on much bigger equity nest eggs than they think? Do you know how much equity you’ve got? If not, could you be missing opportunities to tap into it for worthwhile projects at close to all-time low interest rates?
Academic and financial industry research suggests that large numbers of Americans don’t keep track of their equity and don’t really know how they could use it. That’s curious because home equity has almost never been higher or easier to access. The Federal Reserve estimates that, thanks to rising prices and principal paydowns, total home equity surpassed $13 trillion in the first quarter of this year, more than double what it was in 2011. Black Knight Financial Services, a mortgage data and analytics company, estimated last week that $4.4 trillion of equity is immediately “tappable” — that is, owners can withdraw funds via equity credit lines, equity loans and cash-out refinancings, and still retain a healthy equity cushion in their homes.
Equity is the difference between the market value of your home and the total mortgage debt you’ve got against it. A $350,000 house with $175,000 in mortgage debt has equity of $175,000 — a 50 percent equity position. Thirty eight million owners nationwide have at least 20 percent equity, averaging $116,000 per owner, according to Black Knight. Many lenders will allow owners to tap into that equity to the extent that their total debt does not exceed 80 percent of the home’s appraised value.
So in the example of the $350,000 house with $175,000 in equity, you might be able to borrow another $100,000, bringing your total debt up to $275,000 or just under 80 percent of your property value. If there’s no need to pull out that much — say you need some cash to renovate the kitchen and add a bathroom — you could borrow considerably less, say $25,000 or $50,000.
But before any of that happens you need to know the basics about equity — starting with how much you’ve got. Research by mortgage investor Fannie Mae and analytics firm CoreLogic has documented that owners frequently underestimate the home equity they’ve accumulated. Millions of owners saw their property values plummet during and after the financial crisis and recession. Following that nightmare many seem to have tuned out news of home value rebounds, which have been substantial in many metropolitan areas and spectacular in others.
If you don’t know your home’s approximate value, it’s tough to calculate your equity position, even if you know your unpaid mortgage balance to the penny. There are multiple resources online (Redfin.com and realtor.com are examples) to help you keep up with local sales trends and provide rough estimates of almost any property’s value. Just type in an address and see what pops up. You can also talk with local realty agents and, if you’re willing to spend a few hundred dollars, hire an appraiser to get a professional opinion.
Then there’s the knowledge gap about equity-tapping tools and uses. New consumer survey research by Navy Federal, the world’s largest credit union, found that 55 percent of survey participants reported having “little or no knowledge of home equity loans or lines of credit.” Eighty-eight percent were generally aware that home equity funds could be used for renovations to their homes, but between 32 percent and 48 percent didn’t know they could spend equity dollars on medical bills, weddings, and “unexpected expenses.” In fact, lenders do not restrict your use of equity cash.
Equity credit lines, popularly known as HELOCs, allow you to pull out funds whenever you need them, up to a set limit. Navy Federal’s HELOCs provide a 20 year period of withdrawals followed by 20 years to repay the balance. The current variable interest rate is 3.99 percent.
Equity loans are fully amortizing second mortgages — you pay interest plus principal for anywhere from 5 to 20 years. Interest rates at major banks run from the low 4 percent range upward, depending on your credit standing and equity cushion.
Still another way to access equity is to refinance your mortgage for a higher amount than your current balance — a cash-out refi. It’s like any other refi except that you walk away from the closing with money in your wallet and a larger loan balance, ideally at a lower interest rate than you had before.
Bottom line: Check out your equity. You may well have more of it at your disposal than you thought.