Home prices just dropped to an 11-year low. Here's what you should do now.
The Federal Reserve raised interest rates again earlier this month, their tenth such hike since March 2022. The effect rate hikes have had on the real estate market, predictably, has not been encouraging.
Existing home sales receded 3.4% in April to a seasonally adjusted annual rate of 4.28 million, the National Association of Realtors announced on Thursday. Overall, sales dropped 23.2% from one year ago. Home prices are also dropping. They're down 1.7% to a national median of $388,800, the association said. That's the lowest they've been in more than a decade, or since 2012. Specifically, prices increased in the Northeast and Midwest but fell in the West and in the South, the NAR said.
In this environment, it makes sense for homeowners to use their existing home equity now. If they wait and prices continue to drop, they will have significantly less money to use to pay for major expenses or finance home repairs and renovations.
Start exploring your home equity options here to learn more.
Why you should use your home equity now
Your home equity is calculated by accounting for two factors: How much of a mortgage balance you have remaining (if any) and how much your home is worth/can be appraised for on the current market.
For example, let's say you had an initial mortgage balance of $400,000. You've since paid down that mortgage to $300,000. While doing that, your home value increased to $500,000. In this case, you would have $200,000 worth of equity. Since most lenders will cap the amount of equity you can borrow at 80% to 85%, you would theoretically be able to withdraw $160,000 to $170,000 of your equity. If your home is worth more than $500,000 or if you owe less than $300,000 (or both) then you could potentially get more.
However, half of your home equity calculation is dependent on your home's price at the time of your application. If you're living in one of the areas of the country where home prices are falling, then you may get less now than you could have 12 months ago. So if you need money and don't want to rely on high interest rate alternatives like credit cards and personal loans, it makes sense to tap into your home equity now, while it's still relatively high.
Check your home equity options here now.
How to use your home equity now
There are multiple ways to use your home equity today. Here are three of the best options.
Home equity loans
Home equity loans allow you to borrow a lump sum from your home equity to use as you see fit. Interest rates on home equity loans are fixed and they're typically much lower than what can be obtained with a credit card or personal loan. Your home is the collateral in this scenario, so make sure you're able to repay the loan when it comes due. Strongly consider using a home equity loan for home repairs and renovations, as the interest you pay on it may be tax-deductible at the end of the year.
Cash-out refinance
A cash-out refinance involves taking out a new mortgage loan to pay off your existing one. The new loan you take out will be for a larger amount than you owe. You can then take the difference between the two as cash for yourself. Just make sure you compare rates in advance. Mortgage and mortgage refinance rates are higher than what they were a few years ago so you'll want to carefully crunch the numbers before acting.
HELOCs
HELOCs operate much the same way home equity loans do. HELOCs, however, don't come in a lump sum and instead function more like a revolving line of credit similar to credit cards. HELOCs also have variable interest rates, so be careful. That said, you'll likely pay less interest with this option since you're only liable for the interest on what you use, not the full amount applied for (unlike home equity loans). HELOCs also qualify for the same tax deduction that home equity loans do.
The bottom line
In today's rate environment and with home prices dropping in many parts of the country, it may make sense to act quickly and utilize your existing home equity while it's still substantial. You can do this in multiple ways, from home equity loans to cash-out refinancing to home equity lines of credit. Do your research to discover the best option for your financial needs. Get started now!
