Untapped Equity Means Financing Outside of Traditional Loan Routes
As of 2019 Americans are sitting on more than 5.9 trillion in untapped home equity. That means more options than ever before when it comes to financing those special projects!
In years past most refinances were done to change from an existing loan into an entirely new one. Interest rates were a major driving factor, but many refinances were also done to switch programs or alter payment terms.
As interest rates have increased there’s been a noticeable shift away from these classic reasons for refinancing in favor of more equity-driven solutions. This is where the homeowner essentially gives themselves a loan.
Cash out programs took a lot of blame during the 2008 financial crisis and for good reason- many lenders placed few or no limits on how much equity could be drawn out of a property. When the recession finally hit homeowners who had overborrowed on their homes found themselves completely underwater.
Today’s cash out are subject to more stringent guidelines that typically cap out at 80% of the home’s market value. In practice it would look something like this:
Market Value: $200,000
80% of Market Value: $160,000
Loan Balance: $100,000
Cash Out Maximum: $60,000
These limitations have helped cash out programs rehabilitate their image from a sign of irresponsible lending to a valuable vehicle for financial management.
Your Equity Works For You
Loans from refinancing your home’s equity often provide a great solution to medium sized financing needs. These are the kind of loans too small for bank lending but large enough that you can’t just put them on a credit card. A few of the most common uses for equity financing include:
Renovations. With moving expenses at an all time high it makes perfect sense for homeowners to renovate their existing home rather than moving. The right renovations can add tremendous value to a home, which serves to offset that initial drop in equity. That characteristic makes renovations among the most popular reasons to seek a home equity line of credit.
Debt Consolidation. Even though mortgage rates have risen they’re still far below traditional interest rates. If you’re struggling to pay off several high interest loans your home’s equity can be a smart way to reduce these payments and earn some financial breathing room.
College Tuition. Home values are among the few vehicles that have kept pace with rising tuition costs. Parents are increasingly tapping into equity to give their children a head start when it comes to offsetting the high cost of schooling.
Business Loans. Small business loans can be a challenge to secure, and very often they come with strict qualification requirements. Short term business expansion can be financed quickly and with much less red tape by using home equity as opposed to the bank route.
Making Sense of It All
Is cash out refinancing a good move for your pocketbook? The only way to decide is by weighing the pros and cons.
On the plus side; home equity based loans often have better interest rates and lower associated costs than traditional finance programs. If you need money for a project that isn’t quite the right fit for a credit card or a bank loan equity might be a great choice.
On the con side; a refinance will lower the equity in your home and create an entirely new loan with different terms from before. The money doesn’t come without collateral, as your home now serves as guarantee for the loan.
There’s no better way to figure out which course of action makes sense then by speaking to a trained finance professional. At Service First, our loan officers aren’t selling loans- they’re selling solutions. Speak to a member of our team and see if a cash out refinance makes sense for you.
If you’re ready to get started on your home buying journey, we can help!
Contact us today!