More Americans are tapping their homes for cash, taking advantage of low interest rates and the rise in home values.
Total home equity cashed out in the first quarter of this year is estimated at $49.6 billion, up nearly 80% from a year earlier, according to data from
It is the highest level on record since 2007, but still below the $84 billion quarterly cash-out volume in 2006.
Jenny Puls is one such homeowner. After looking for a larger house for more than a year, Mrs. Puls decided she was better off adding a second floor to her family’s 1,600 square-foot craftsman-style home than buying in this year’s overheated market.
“We just ran out of room; my office had to become the nursery,” says Mrs. Puls, a Realtor who has a 9-month-old daughter.
Her Houston-area home had appreciated to $645,000 from the $220,000 she paid a decade ago. She cashed out $336,000 and refinanced to a new 30-year fixed mortgage of $500,000 at 3% in order to add two bedrooms, an extra living room and a kitchen expansion. Though her monthly mortgage payments doubled, and she has had to pull $40,000 out-of-pocket to finish financing the renovations, she says this was the better option for her.
“I think the inability to find what you want has caused people to really rethink, ’Can I stay where I am? What would make me happy?’” says
a certified mortgage consultant who helped Mrs. Puls with her loan. “And yes, they have chosen to refinance and pull out some equity so they can improve their home and be happy where they are.”
If you are also thinking about pulling equity out of your home, here is what you should consider.
Learn the basics
How much equity will you take out, and what happens if home prices slip in the near future?
In general, you can extract as much as 80% of the equity you have accrued in your home. For example, say you bought a home for $250,000, putting down 20% at the time. You have since paid off $50,000 of your original mortgage, and the home’s value has risen to $650,000. You could potentially refinance with a new, $520,000 mortgage and take $370,000 of that in cash; the remainder would go to pay off your existing loan.
How much you should take out depends on your financial situation. If you have great job security and you are using the money for something that can pay dividends into the future, like renovating your home, then it is possible that maxing out your equity could make sense.
“While we’re seeing an increase in the use of cash-out refis, it’s still a low level of home-equity withdrawal compared to what we saw during the financial crisis,” says
chief economist at the Mortgage Bankers Association. “U.S. consumers are more cautious now than they were before.”
Prior to the 2008 subprime-mortgage crisis, many homeowners overextended and pulled too much equity out of their homes when prices were booming. Once prices crashed, many owed much more than their house was worth.
Make sure that you can afford the new monthly mortgage-payment amount, which could increase significantly. If you stretch your monthly budget too far and there is an economic downturn, you could lose your house.
Pay attention to taxes and value-adds
If you use the money to improve your home, ensure that it adds substantial value. Certain frills like high-end materials or luxury upgrades might not go the distance in the same way that modernizing a kitchen and bathrooms would.
If you don’t use the money for home improvement, you will no longer be eligible for the mortgage interest deduction in your taxes. If you use the money to start a business, however, it is possible that you may be eligible for another tax break, so speak with your tax adviser about the tax implications of home equity loans for your specific situation.
Another way to use the money is to pay off high-interest debt. While it doesn’t include tax benefits, it could result in significant interest savings.
Know the difference between a cash-out refinance and a Heloc
In a cash-out refinance, you get a new mortgage on your home’s current value and cash out some of the equity that you have in the home, which has likely increased along with higher prices.
The interest rate for a cash-out refinance at the $548,250 Fannie Mae limit is hovering at about 3.25%-3.75% for a 30-year fixed loan. Any amount you take out above the limit might have a higher interest rate.
A home-equity line of credit, or Heloc, has a variable interest rate attached to it and works more like a credit card. Instead of getting the money all at once, you open up a line of credit against your house with a limit.
The interest rate for a Heloc is closer to 4%, with closing costs around 2% of the loan amount.
Doug Henning, a software developer in Jacksonville, Fla., took out a Heloc 15 years ago to help pay for his daughter’s wedding. His limit was set at $50,000, but he dipped into only a portion of it. After the Tax Cuts and Jobs Act of 2017 made Helocs no longer eligible for the mortgage interest deduction, he paid off the Heloc and a few credit cards with a cash-out refinance in 2019. Last year when interest rates dropped, he refinanced his mortgage again, down to 2.75% from 4.5%.
“To me this is like taking advantage of the system, as long as you’re knowledgeable enough to not get way in over your head,” says Mr. Henning.
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