Surge in Home Prices Leads to Cash-Out Boom
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December 3, 2021

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Higher home prices and lower interest rates have led to a significant increase in equity withdrawals this year.

According to Freddie Mac, there was a 33 percent increase in refinance activity in the first half of this year compared to the first half of 2020.

In the second quarter of the year, about 63 percent of all properties had an equity increase of nearly $2.9 trillion since the second quarter of 2020.

This breaks down to a gain of about $51,500 in equity per borrower, with states such as California seeing even larger gains.

With this extra equity, many homeowners decided to head to a mortgage lender to find the best way to access this cash.

Homeowners withdrew more than $63 billion in equity through 1.1 million cash-out refinances in the second quarter of this year.

Record-low interest rates initially spurred refinance activity, with many homeowners taking advantage of the opportunity to find a better rate and adjust their terms.

The added bonus was the cash-out option, to increase the amount of the new loan and take the difference in cash.

At a time when many homeowners are facing pandemic-related financial difficulties, this cash provides an opportunity to pay down debts or make home improvements.

Experts agree that this could be a smart move for many homeowners, allowing them to increase the value of their home with needed improvements. 

Some borrowers opt to use those funds to invest in another property, which also could be a smart long-term move, experts say.

Weighing these decisions can be done under the guidance of a financial advisor and mortgage lender.

Homeowners have a few options when it comes to tapping into their equity. Three popular options are the cash-out refinance, home equity loan, or a home equity line of credit (HELOC).

With a cash-out, homeowners may be able to access large amounts of cash that they can use in whatever way they’d like. When they refinance to a new loan, it will be more than what is currently owed.

The difference between what a homeowner owes and what the new loan amount is will be provided to them in cash.

A HELOC is a second mortgage with a revolving credit line. Homeowners can tap into the credit as needed, make payments, and take cash out again. The credit line is open until the established term ends.

Home equity loans are second mortgages that provide a fixed amount of cash the borrower will repay over a set period of time.

Financial experts advise that these options are used with caution, so borrowers don’t end up in more debts they can’t repay.

However, when done wisely, they agree that the opportunity to fund investments or necessary updates can outweigh the risks.An experienced lender can help a borrower weigh all their options, and determine whether refinancing at this time will offer any real savings.

Photo by RODNAE Productions from Pexels

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