With Home Equity at Record Levels, Is It Time To Tap Into It?

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If you’ve been thinking about tapping into your home equity to finance a renovation or large purchase, there may be no better time than now. Last year the amount of equity that borrowers could take out of their homes hit a record — but accessing the money might take some strategizing.

See: 20 Home Renovations That Will Hurt Your Home’s Value
Find: How To Refinance a Mortgage

The record level of home equity is the result of soaring home prices in the United States, CNBC reported on Tuesday. About 46 million homeowners held a total of $7.3 trillion in equity at the end of 2020, according to data from Black Knight, a mortgage technology and research firm. That was the largest amount ever recorded.

This has many homeowners considering ways to tap into their equity for home renovation projects. But doing so could be a challenge for many Americans. As The Wall Street Journal reported last month, homeowners looking for a home-equity line of credit, or HELOC, face a few obstacles.

A HELOC is a good option because it’s a revolving line of credit that offers better rates than a credit card. The average interest rate on this type of credit is 4.86% vs.16% for credit cards, according to Bankrate.com.

Make Your Money Work Better

The problem is, some U.S. banks suspended the origination of HELOCs in April 2020 during the early days of the COVID-19 pandemic — including big players like Wells Fargo, JPMorgan Chase and Citibank. Many of those suspensions are still in place. Even banks that do offer HELOCs have stricter standards than before the pandemic, meaning you might need a high credit score and low debt-to-income ratio to qualify.

But there is another option that lets you draw cash from your home: a cash-out refinance, which lets you refinance your old mortgage by replacing it with a new one, except with a larger amount.

See: Cash Out Refinance: When Is It Right For You?
Find: Home Upgrades That Will Stand the Test of Time

A cash-out refinance typically offers lower rates than home equity loans and mortgages. Plus, you might be able to deduct the interest on the first $750,000 of the new mortgage if the cash-out funds are used to make capital improvements. It’s an especially good option when mortgage rates are historically low — as they are now  — because even though you are taking out a bigger mortgage, you’re lowering your interest payment.

If you are interested in this kind of option, a new federal refinancing program is available that will let eligible borrowers refinance their mortgages at reduced interest rates and at lower monthly payment. The program, which kicks off this summer, could save borrowers $100 to $250 a month, according to the Federal Housing Finance Agency.

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