The past 10 years have been good ones for homeowners holding their properties, as record home values have soared higher and higher, allowing the middle class to start building some serious intergenerational wealth.
A recent report from the National Association of Realtors found growth totaling $8.2 trillion in home values between 2010 and 2020, a figure backed up by CNBC. Surprisingly, the pandemic’s housing boom played a major factor in increased home values, as bidding wars ensued coast to coast.
Tapping into this equity boom may not be as simple as selling or flipping a property in this economy however, as the Fed’s recent move towards more restrictive rates has cooled the housing market, at least for now. But when it comes to cash-out refi opportunities, we’re looking at a whole different ballgame.
Housing Moving From Hot to Cold? Try This Savvy Move
As CFP Dennis Nolte puts it: “You can’t eat your equity, but if you can monetize some of it to reduce debt and make life easier from a cash flow perspective; that makes a ton of sense in most situations.”
One savvy move is to execute a cash-out refinance, and then use the proceeds to re-invest in an income producing rental property, particularly a multi-family dwelling like a duplex, triplex, or even a quadroplex.
Basically by doing this, you’re leaning into a cooling market by providing a service to renters for decades to come. Each unit generates a monthly rental income, which can oftentimes more than cover the mortgage payments and maintenance, all while your investment property value increases in the years and decades to come.
Executing Your Cash-Out Refinance
So your home value is higher than ever before, and you’re ready to apply for a cash-out refinance. What do the next steps look like? Well, to pump your savings or brokerage account with some serious liquidity, or invest in a real estate venture like we suggested above, here’s what you need to do.
First, shop around with multiple lenders for the lowest rate possible. You can use certain online platforms to do this quickly, streamlining the process in order to refinance your property with a larger mortgage than you currently have.
The difference is what you’ll yield in cash. If you can reduce your rate at the same time, that’s a serious win-win, as there may be a way to pull a bunch of cash out and not even increase your monthly payment, depending on the term you choose.
The Home Equity Loan Option
A home equity loan is an interesting option as well, as this allows you to tap into some of your home’s increased value. In a nutshell, this scenario lets you take cash out against the value of your home, and pay it off over a period between 10 and 30 years.
Whenever you apply for and carry through with a loan like this, there will be closing costs and fees. Additionally, you’re taking out a lump sum here, and there will be interest on that as well.
If you need tens of thousands, or even hundreds of thousands of dollars in a hurry, this is a great option. Just make sure you budget properly, speak with multiple lending experts to compare rates, and see if there’s a rate low enough to lock in.
Home Equity Lines of Credit
This option, also known as a HELOC, is another savvy way to tap into your home’s appreciated value. In this scenario, you’re not taking a loan out at a fixed amount. Instead, you’re using your equity as a line of credit, meaning you have the option to take as much out as you need at a time, or not take out anything at all. Basically it’s just a bunch of money that is now available to you as needed.
Maybe you’d like to set that number at $100,000. Great! You now have access to that amount, but it’s up to you whether you want to take any out or not. It’s almost like having an extra, new bank account at your disposal.
As Mason & Associates CFP Thomas Blackburn put it, “You have a pool of money you can draw on, and it doesn’t cost anything unless you use it.” These are popular loans that many financial experts recommend to clients. It’s basically like having an insurance policy, or a safety net of money you know you can tap into if needed.
How to Secure Lower Rates on Home Equity
HELOCs are currently seeing some of the lowest rates in the mortgage market, as borrowers with credit scores over 660 may be able to qualify for rates in the 3-5% range. The market is currently volatile however, meaning if you see a low rate one day, it could very well be gone the next.
Which is why mortgage experts recommend keeping a close eye on interest rates overall, and striking while the iron is hot by locking in a low rate if it becomes available to you. If you do tap into your home’s equity, whether it’s to make home improvements, consolidate debt, or reinvest in a rental property, just make sure you’re comparing multiple banks to really get a detailed overview of their offerings.
When it comes to consolidating your debt, in particular, look for high interest credit cards, where you may be paying anywhere from 16-30% interest, and pay those off with your cash-out refi, home equity loan, or HELOC. By doing this, you’ll be leveraging a rate under 5%-6% instead, saving thousands and thousands in interest.
No matter which option you choose, remember: your home equity may be higher right now than it’s ever been before. So crunch some numbers, talk to some experts, and if the timing is right, make that move. It may very well be your first step to building a serious intergenerational real estate fortune.