In the third quarter of 2022, the Federal Reserve estimates that U.S. homeowners accumulated $29.5 trillion in home equity. In any case, this is a sizable sum of money. Intelligent homeowners have always used home equity to boost their financial security and increase their wealth. But, many homeowners need help to use their home equity. Although “location, location, location” is the golden rule for estimating a home’s worth, leveraging that value is a numbers game. Low credit scores, high debt levels, and increasing mortgage rates have all influenced how far this dynamic wealth creator can go.
We must increase the channels for leveraging home equity to improve our communities and ensure fair results. Financial planners who work with clients with a large percentage of their wealth invested in their main house want to look more closely at the alternatives accessible to homeowners to assist in creating a long-term financial strategy. While suggesting these solutions to customers, advisers should take into account the following difficulties:
Backward Mortgage
Reverse mortgages may be a viable alternative for elderly homeowners still living in their houses and at least 62 years old. There is considerable flexibility since there are three different varieties of this product. These are highly regulated products, and homeowners must go through financial counseling to determine whether they should choose one over the others based on their financial circumstances.
Suppose no family members are interested in inheriting the property. In that case, a reverse mortgage may be a possibility for customers who have no debt aside from an existing mortgage since the money may only be used to pay the mortgage. As there is no set payment schedule, cash profits may be reimbursed whenever necessary, giving the ability to manage cash flow and costs. Cash proceeds can be dispersed as a lump amount, line of credit, or monthly payment. While the sum does accumulate interest, unlike a conventional mortgage, which reduces with each payment, the balance grows over time.
Refinance with Cash Out
When house prices are increasing, and loan rates are decreasing, the cash-out refinancing option is the best choice. It is not a viable alternative for many homeowners today, particularly those trying to reduce loan payments, due to the opposite happening. However, property owners who insist on taking this route should be aware of the following: • The current value of the home must be greater than the mortgage balance; • This is treated as a new loan, so mortgage costs start over at zero; and • Closing costs are frequently included in cash-out finance options.
Along with meeting the lender’s credit score and debt-to-income ratio requirements, the homeowner must also have at least 20% equity in their house. There are better alternatives for most homeowners in today’s market.
Home equity loans and home equity lines of credit
The nationwide average for a 30-year fixed mortgage is now 6.37%, but that number is anticipated to increase as the Federal Reserve has indicated it would keep raising rates to fight inflation. Home equity loans and credit lines (HELOC) are challenging. HELOC funds are a continuous credit line susceptible to interest rate increases even though they may be utilized for any purpose. For a customer seeking to pay off debt or consolidate debts, this might mean accumulating more debt. There is less chance of a ballooning payment since home equity loans are fixed-rate lending products. But, homeowners should move swiftly if this is the course they choose due to rising interest rates.
Home Equity Contracts (HEAs)
Home equity agreements (HEAs), commonly called home equity investments (HEIs), are relatively new and are not loans. Both a payback period and interest fees are absent. Instead, they enable a business or person to purchase a stake in some of the house’s current equity. The investor contributes funds as a flat amount or regular payments. Because there are no limitations on how the HEA payments may be utilized, this option may be practical for customers with bad credit or who need help making their mortgage payments. By paying off existing debt and enabling the homeowner to refinance their current mortgage into one with a reduced interest rate, the money might be utilized to improve credit ratings. The homeowner must buy out the investor’s part in HEAs before the termination date, typically 10 to 30 years, or contemplate selling the house.
Even though they are all possibilities, not all are accessible to our neighbors. House ownership continues to be a vital component of the American Dream and a concrete indicator of success. It may also serve as a launchpad for further wealth accumulation. The tidal wave that lifts all boats may be attributed to businesses and platforms devoted to bridging the wealth gap by providing easy home equity access options and the technology, knowledge, and assistance to boost their customers’ financial capability.
