How to Take Equity Out of Your Home!
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You’ve probably seen your home and homes nearby that have doubled or tripled in value over the past years or decades. Generally, the main source of a net worth for homeowners is directly related to the equity tied up in their primary home. Equity is the difference between the current market value or appraised value and the existing mortgage debt if the property is not free-and-clear with no secured debt.
Lenders will then offer you a loan amount that’s a percentage of the appraised value in loan-to-value (LTV) ranges that may vary between 50% and 90% LTV or higher, depending upon the lien position as a 1st or 2nd, the borrowers’ creditworthiness, the income and expense documents provided, and other factors.
Some private money lenders might offer loans up to just 50% LTV as a first mortgage at a rate above double-digits to homeowners who have lower credit scores and can’t document their income. Other lenders may offer above 90% LTV loans for borrower applicants with high FICO credit scores, consistent income, and relatively low debt-to-income (DTI) ratios. The DTI formula is calculated by lenders by dividing a borrower’s gross monthly income by their current or proposed future monthly expenses for things like mortgage payments, automobile loans, and credit card payments.
Many lenders don’t want to provide loans or lines of credit that exceed 80%, 85%, 90%, or 95% LTV due to increasing risk. Minimal equity is not good for either the homeowner or the lender because the home is the primary collateral which secures the loan.
Let’s take a look at a few loan-to-value (LTV) scenarios below for a home appraised at $500,000 to better understand the maximum loan amount allowance options:
50% loan-to-value: $250,000 loan
55% loan-to-value: $275,000 loan
60% loan-to-value: $300,000 loan
65% loan-to-value: $325,000 loan
70% loan-to-value: $350,000 loan
75% loan-to-value: $375,000 loan
80% loan-to-value: $400,000 loan
85% loan-to-value: $425,000 loan
90% loan-to-value: $450,000 loan
95% loan-to-value: $475,000 loan
Your loan-to-value: $Your,cash loan
As of July 2022, 80% of all outstanding home mortgage loans nationwide had interest rates at or below 4%, as per CoreLogic. Between April 1971 and September 2022, the average 30-year fixed mortgage rate was 7.76%. The 30-year fixed rate peaked near 18.6% in October 1981. In early 2023, many 30-year fixed mortgage rates are still below historical averages over the past 50+ years. There are a few different ways to pull cash out of the equity in your home. Let’s take a look next at some of the most common ways that borrowers convert the equity in their home to cash:
Home Equity Loan: This is a second mortgage that usually has a fixed rate, fixed monthly payment, and a defined loan term that can be due within anywhere between a few years up to 5, 7, 10, 15, or 20+ years in many cases. The rates are typically higher than the existing 1st mortgage because any future foreclosure actions taken by a lender for nonpayment could completely wipe out the 2nd loan at the final auction sale. The borrower is required to pay the full monthly payment on the entire amount of the loan shortly after it funds.
Cash-Out Refinance: The challenge here for most borrowers with an existing 1st mortgage that was funded within the past 10 years or so is that their mortgage rate may be at or near all-time record lows. You may never see a 1st mortgage rate that low again. As a result, many borrowers don’t want to see their interest rate on their 1st mortgage double or triple while their payments increase significantly.
Home Equity Line of Credit (HELOC): A HELOC is a line of credit that can be in first or second lien position as a mortgage that may be tied to a variable index and rate. You may have a revolving balance just like with a credit card. At the initial closing, some borrowers may pull out a few thousand dollars while others may pull out $50,000 to start a kitchen remodel. Either way, it’s up to the borrower how much that they want to borrow and pay back each month. If the line of credit remains at zero for months or years at a time, then there’s no monthly payment required.
An estimated 35% of respondents amassed significant holiday debt. Americans racked up an average of $1,549 for holiday debt through December 31, 2022, as per a LendingTree survey. This holiday debt number was up 24% as compared to the previous year and the highest in the eight-year history of LendingTree’s survey.
As of early January 2023, the average credit card interest rate carrying charge reached 19.2%, according to MoneyGeek. Yet, the total APR (Annual Percentage Rate) for a credit card cash advance rose to a staggering 25% rate. If you pay the minimum payment on a credit card debt that’s over a few thousand dollars, it may take you more than 30 years to completely pay off the debt in full. By comparison, a secured HELOC loan that may be tax-deductible (check with your tax advisors) is usually much more affordable than an unsecured credit card loan.
The most common first human reaction to fearful topics is usually denial. However, what we avoid in life controls us. This is especially true with debt. Few of us want to closely analyze how high our current credit card rates may be closer to 20%, especially after the holiday bills start arriving and tax season is just around the corner.
What’s your monthly budget?
To quickly pay off your debt, please write down a monthly budget that includes your household income and overall monthly expenses. For example, let’s take a look at the household income and expenses for a fictional married couple with two sources of income:
Gross Monthly Income $9,000
Monthly Expenses Mortgage (principal, interest, taxes, and insurance): $1,750/mo. Automobile loans: $1,390/mo. Credit cards: $830/mo. Utilities: $710/mo. Student loans: $625/mo. Groceries and restaurants: $500/mo.
Total monthly debt payments: $5,805 per month
If much of this fixed monthly debt can be paid off with a new line of credit from Hitch, the monthly payment obligations could fall by hundreds or thousands of dollars per month depending upon a wide variety of factors like loan terms, rates, borrower creditworthiness, and loan-to-value ranges.
After completing your budget, please start checking your home value estimates online for an approximate current market value range. While your home may be incredibly unique and have many more upgrades to it than your neighbors, these online estimates can be a great starting point. At a later date, the appraisal report will provide you with a more detailed and thorough value analysis. Next, please review the information about the HELOC funding solution that can help you pay off your debts sooner rather than later. Hitch has leveraged and combined advanced technology, the online loan application process, and access to capital for our clients so that it’s more simple and at a faster application and approval pace.
New and used automobile loans also reached all-time record highs in recent times. In late 2022, automobile loans hit $1.52 trillion dollars. The automotive research company named Edmunds released data showing that the average monthly payment for a new car was $717 and $563 for a used car near the end of 2022. By comparison, new and used cars five years prior were $525 and $389, respectively.
More surprisingly, Edmunds reported that almost 15% of drivers were paying more than $1,000 per month for a new car in late 2022. An estimated 5% of consumers who financed a used car were paying more than $1,000 per month as well. Interest rates for both new and used car loans can exceed 10%, 15%, or 20% while the same car asset tends to rapidly fall in value as time moves forward.
More than 25% (1 in 4) car buyers in Wyoming and 20% (1 in 5) in Texas agreed to $1,000 or higher per month automobile loan payments. This is partly due to the much higher volume of pricey truck sales in those states. California (18.3%), Utah (19.1%), Colorado (17.4%), Kansas (17.5%), and Montana (19.1%) also had very high numbers of state residents who paid more than $1,000 per month for auto payments.
Rates on automobile loans have absolutely spiked over the past year. Near the start of 2022, new automobile loans for many creditworthy borrowers were near the 3% and 4% rate ranges. As 2020 moved forward with multiple Federal Reserve rate hikes, the average rate for new car and used car loans reached near 6.5% and 10%, respectively, according to Edmunds.
For many Americans, they rely upon both the equity within their homes if they’re fortunate enough to be a homeowner and various government-assistance programs. A high percentage of homeowners today are over the age of 50 or 60. If so, they may have already reached early retirement age and may be living off of the equity in their real estate, stock, and pension investments that are also supplemented by one or more government-assistance programs offered by Social Security, Medicare, or some other agency.
In recent times, the Trustees for both Social Security and Medicare published reports that were shared with the general public about how both groups may run out of funds in the near future. In fact, the report drafted by the Social Security Trustees included details about how Social Security was on pace to not be able to fully guarantee all benefits as soon as 11 years from now in 2034. It’s claimed that the Social Security fund may start running budget deficits of almost $2.5 trillion dollars over the next decade if the same income and expense trends remain on course.
Instead of being able to commit to payouts of upwards of 100% of benefits for each Social Security recipient, the Trustees are openly sharing possibilities of discounting monthly payouts to lower levels such as 80% or below of what the recipient may be receiving now. Sadly, many retirees need every cent from their Social Security checks to survive and pay their bills. Any potential discount of 5%, 10%, 15%, 20%, or more can be devastating unless the same person has access to other funds.
The average Social Security benefit check paid out in 2022 was $1,657 per month or $19,884 per year. A 20% reduction in monthly benefits paid out without using future inflation adjustments would be equivalent to a reduction of $331.40 per month. As a result, the new lower monthly payment amount might be $1,325.60 (80% of $1,657).
The Medicare Trustees have published their own gloomy financial reports as well. According to them, the Medicare Hospital Insurance (HI) trust fund is on pace to run out of cash reserves over the next five years by 2028. Each year, you may hear about how the federal budget is not balanced and the government may be running a $30 trillion dollar budget deficit. If so, this means that the federal government is spending more each year than they are collected in tax revenue. If you were to act the same way and spend more money than you earned each year, you’d likely drain your savings accounts and end up with no liquid funds to pay your monthly bills.
You need to remain in control of your finances. You’re the person who can best protect you and your household more than anyone else. Start on unlocking the value of your home now!
Borrow from yourself, not the bank!
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