The record increase in home prices is a main storyline in the 2021 housing market. While this presents a challenge for homebuyers, it’s also an unprecedented opportunity for homeowners to use their newly acquired home equity.
According to the latest Mortgage Monitor report from Black Knight, the average homeowner has $153,000 in equity that can be tapped while still maintaining 20% equity in their home.
Low refinance rates and high home equity create means it’s prime time for homeowners to use a cash-out refinance to simultaneously lower their interest rates while using home equity to pay for home repairs, which further increase the value of your home.
The recent surge in home equity
Home equity typically increases as homes appreciate and borrowers make mortgage payments, but the sudden rise in home prices is fueling home equity gains at breakneck speed.
According to Black Knight, the combined tappable equity for U.S. homeowners has increased every year since 2011. It hit $8.1 trillion at the end of first quarter of 2021, up from $2.2 trillion a decade ago.
Not only is this pool growing, it’s growing at the fastest rate in five years. In the first quarter of 2021, tappable equity grew by 23% year-over-year — a substantial increase from the 10% year-over-year growth in the first quarter of 2020.
In fact, the combined total of tappable income grew by 11% — more than $800 billion — in the first quarter of 2021 alone. That quarter-over-quarter increase more than twice the year-over-year increase from from 2017 to 2018.
Using home equity to increase the value of your home
Given the recent acceleration in home equity gains, the average homeowner gained nearly $16,000 in home equity in the last three months alone. While it may be tempting to put that money toward a vacation or new car, it can go a lot further if it’s reinvested into your home.
That $16,000 is enough to complete two of the three most popular and affordable home improvement projects that will add value to your home.
For example, the average bathroom remodel — the most popular renovation project for 2021 — costs $13,401. Homeowners could use a cash-out refinance to lower their interest rate and pay for a bathroom remodel that updates the design, adds resale value, and decreases operating costs.
And, after updating the bathroom, they would still have more than enough left to paint the entire interior of the house for the average cost of $2,007.
If they cash-out for $20,000, there would still be room in the budget for the average flooring project, which has a return on investment between 70% and 80%.
That $20,000 could also tackle a larger project like replacing windows, adding a deck, replacing siding, or a minor kitchen remodel — all of which add substantial comfort and resale value to the home.
Cash-out refinances on the rise
Given the conditions — low interest rates and high equity — it’s no surprise that cash-out refinances are on the rise. According to Black Knight, cash-out refinances made up 42% of all refinance loans locked in the first week of June.
That’s the highest share since 2019 and it will likely continue to rise since borrowers with a 3.75% interest rate or higher hold nearly half of all tappable equity. Average rates are running much lower than that, says Freddie Mac.
As long as interest rates remain near their current level, cash-out refinances will be a valuable option for many homeowners.
When interest rates do rise to pre-pandemic levels, cash-out refinances will likely give way to home equity lines of credit (HELOC), as nearly a quarter of tappable equity is held by borrowers with sub-3% interest rates. HELOCs allow homeowners to leave their primary mortgage intact while tapping into equity via an additional loan.
Regardless of interest rates, the rapid influx of tappable equity provides a window for homeowners to cash in rising home prices to improve their financial future.