Americans are Tapping Their Homes for Cash
The Newfound Piggy Bank: Home Equity
With home prices increasing and interest rates near record lows, more people are tapping their homes for cash. In the first quarter of 2021, Americans withdrew $49.6 billion in equity from their homes. That is a year-over-year increase of nearly 80%, andthe highest level since 2007. Tight inventory of existing homes for sale is also driving some homeowners to tap their equity. Instead of upgrading into a larger new home, they are choosing to renovate and expand their existing homes.
Whether homeowners want to fix up their houses or take advantage of lower borrowing costs, there are a few ideas they should understand before using their houses for cash. Here is a breakdown of the major ones.
How Much to Borrow?
To prevent any repayment problems, it is important for homeowners to determine how much equity they can afford to take out. This typically depends on each homeowner’s financial situation. If homeowners have job security and the money is being used to increase the value of a home, for example, then drawing down the maximum may make sense.
Homeowners need to make sure they can afford their new monthly mortgage payments, even in case of unexpected events.
The Benefits of Home Renovations
Homeowners who use the equity for renovations will want to ensure that their project adds substantial value to the home. Some remodeling projects, like modernizing a kitchen or bathroom, add more value than others. Using home equity to pay off high-interest-rate debt is another option. Homeowners won’t get a tax deduction from doing this, but they can save a significant amount of money in interest.
With home prices surging and interest rates still low, taking cash out of a home makes a lot of sense for some homeowners. However, before proceeding, it is a good idea to weigh the costs and benefits.
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