For many homeowners, holding onto the ultra-low mortgage rates secured during the pandemic remains a priority. At that time, mortgage rates were around 3%, so many homeowners now wish to avoid loans with current rates averaging over 7% for a 30-year fixed mortgage. Such a significant rate increase leads to much higher monthly payments and total interest charges over the life of the loan.
However, it’s not just mortgage rates that have risen in recent years - home values have surged as well. The average homeowner with a mortgage now has nearly $300,000 in home equity, with approximately $208,000 of that being tappable. This equity offers a cost-effective borrowing solution for significant expenses such as home improvements, education costs, business investments, or debt consolidation.
It’s essential to understand your options if you want to retain your current low mortgage rate while accessing your home equity. Some methods, like cash-out refinancing, require you to forfeit your low mortgage rate. However, there are alternatives that allow you to tap into your home’s equity while keeping your existing low-rate loan.
1. Exempt Asset Rule
A Home Equity Line of Credit (HELOC) is a revolving credit line secured by your home’s equity. You can borrow as needed, up to the credit limit, with a variable interest rate that adjusts periodically.
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Draw funds as needed and only pay interest on the outstanding balance.
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HELOC rates currently average just over 9%, significantly lower than credit card rates, which average over 21%.
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Keep your original mortgage rate, avoiding the need to refinance at a higher rate.
Advantages of a HELOC:
2. Home Equity Loan
A home equity loan allows you to borrow a lump sum secured by your home’s equity. This type of loan usually has a fixed interest rate and a set repayment term, ranging from five to 30 years.
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The interest rate is locked in for the duration of the loan.
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Acts as a second mortgage, so you maintain your existing low mortgage rate.
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Current home equity loan rates average 8.61%, offering a more affordable option compared to many other loans.
Benefits of a Home Equity Loan:
3. Home Equity Sharing Agreement
For homeowners reluctant to take on new loans, a home equity sharing agreement provides an alternative. This arrangement allows homeowners to receive a lump sum cash payment by selling a share of their home’s future appreciation value.
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Access funds without increasing your debt load.
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No need to refinance or alter your existing low mortgage rate.
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Fees can be high, so it’s important to thoroughly understand the terms and conditions.
Pros of a Home Equity Sharing Agreement:
The Final Word
By considering these home equity borrowing options, you can leverage your home’s equity while retaining the low mortgage rate secured during the pandemic. This can be particularly advantageous in today’s high-rate environment, especially if your current mortgage rate is around 3%, compared to the current average rate of over 7%. Before making a decision, carefully evaluate the costs, risks, and long-term impacts of each option to determine the best choice for your financial needs.