Cashing in on Home Equity

Rising home prices are raising equity levels, and homeowners are cashing in on these gains.

In the first three quarters of this year, the sales volume of single-family homes and condominiums reached the highest level since the same period in 2006, according to property data. Homeowners who sold during the third quarter also reaped the highest price gain in eight years — an average of 17 percent over their purchase price, or $40,658.

Other data shows that homeowners are taking advantage of rising values by refinancing their mortgages in order to cash out a portion of their equity.

The homeowners who are “equity rich,” meaning they have at least 50 percent equity in their homes, has been increasing over all.

But in the third quarter, the share declined from the quarter before, to 19.2 percent of all homeowners with a mortgage from 19.6 percent. The group with less than 50 percent equity, however, grew, while the ranks of those with negative equity shrank.

“What that tells me,” says analyst Darren Blomquist, “is that people are either selling and moving into a bigger home, or refinancing it and leveraging some of that equity, so they don’t have as much equity in the home as they did before.”

Refinancing activity in general has risen in recent months, as interest rates have remained low. In September, refinanced loans represented 42 percent of lenders’ loan volume, according to Ellie Mae, a software provider for the mortgage industry. That was a 5 percent increase over August, and the highest level since May.

In many mid- to high-end housing markets, rising home prices have made it difficult for existing homeowners to move up, and families are tapping into their equity to improve their homes, either as a long-term strategy or to enable them to resell it sooner at a greater profit.

Lending guidelines typically do not allow borrowers to cash out more than 80 percent of their home’s value, although there are some government-sponsored programs that will allow so-called cash-outs of up to 85 percent. The interest rate on a cash-out refinance loan is usually an eighth to a quarter of a percentage point higher than on a straight refinance, depending on the borrower’s credit score and the loan to value.

Interest rates are expected to creep up in coming months, which can make refinancing less advantageous. Homeowners who need access to their equity may be less rate-sensitive than borrowers looking to refinance to cut their monthly payments.

If it’s a good deal now, don’t wait for a better deal tomorrow! Unlike the cash-out craze that accompanied the housing bubble the reasons for cash-out now tend to be much more utilitarian or investment motivated, not for consumption or luxury.


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