# The average homeowner in the United States has a working capital of \$ 153,000.

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## Equity is at an all-time high

With the rapidly rising cost of housing, many Americans are now wealthy in their own capital.

Actually, Recent report The Black Knight company found that the average homeowner in the United States has a net worth of \$ 153,000, a record high.

This accumulated wealth can be used to renovate your home, pay off debts, buy new property, invest, and more.

But how do you actually get capital out of your home? And when should you do it?

## What does it mean to have your own home?

Equity means that you have accumulated cash value in your home. Your equity will grow year after year as you pay off your mortgage and as your home (likely) rises in value.

Of course, capital is not liquid money. The wealth accumulated from home equity depends on the value of your property.

This means that you cannot just spend your own capital. To make money work, you first need to convert your equity capital into liquid money. This is usually done through a cash advance refinancing loan or a second mortgage (more on this below).

But first, here’s how you can determine if you have capital to cash out.

## How to calculate equity

The calculation of equity capital is simple. Just take the present value of your home minus your mortgage balance today.

• Let’s say your home is worth \$ 350,000.
• Your mortgage balance is \$ 110,000.
• Your total capital is \$ 240,000. (\$ 350,000 – \$ 110,000 = \$ 240,000)

Note: The current value of your home will most likely not be the same as what you paid for it, unless you recently bought a property. To get a current estimate – adjusted for house price inflation – you can check the latest sales prices for similar houses nearby on real estate websites or use an online appraisal tool.

## What is “managed” equity?

Available home equity is the amount of money you can actually get out of the value of your home through cash-in refinancing or a second mortgage. Your home income is usually equal to your total net worth minus 20% of the value of your home.

Returning to our example above, here’s how to determine your home equity:

• Home price: \$ 350,000
• Mortgage loan amount: USD 110,000.
• Total equity capital: US \$ 240,000.
• 20 percent buffer: \$ 70,000 (\$ 0.20 x \$ 350,000)
• Available equity: \$ 170,000. (240,000-70,000 USD)

The reason your estimated equity is lower than your total net worth is because mortgage lenders want you to leave 20% of your home’s value intact. Thus, in the event of default on the loan, the lender will be financially protected.

There are exceptions to this rule, mainly for VA loans that can afford up to 100% Loan-to-Value (LTV)… And some lenders allow you to hold less than 20 percent.

But for the most part, borrowers should expect to need well over 20% of the capital to be able to cash out.

Remember, Black Knight estimates that homeowners currently have \$ 153,000 screw-on on average – even with this 20% buffer.

## How to withdraw capital from your home

There are three main ways to increase your capital:

1. Refinancing when cashing out – You take out a new primary mortgage to replace your existing loan. The new loan has a larger balance than your current debt, and this “difference” is returned to you in cash. Closing refinancing costs average about 2-5% of the loan amount and are usually deducted from your cashback
2. Loan secured by equity capital – A Home Equity Loan (HEL) is a type of second mortgage, meaning you keep your existing mortgage and take out a second home equity loan. HEL closing costs are usually lower, but these loans may have a slightly higher interest rate than cash-in refinancing. This can be a good choice if you don’t want to refinance your first mortgage.
3. Equity line of credit (HELOC) – Home equity lines of credit generally have variable rates and low or zero closing costs. It’s a bit like a credit card in the sense that you get a credit line that you can borrow and repay over and over again. And you only pay interest on the outstanding loan balance. HELOCs have set withdrawal periods after which you must pay off the remaining balance in full.

#### What type of loan with a refund is better?

It depends on your personal finances and current mortgage.

Refinancing with cash out is usually best if you want to refinance anyway. You may be able to get a lower interest rate and reduce your monthly mortgage payment while withdrawing cash from your capital at the same time.

Just notice that cashed mortgages usually come with a slightly higher mortgage rate… So be sure to get quotes from multiple lenders and rate them.

On the other hand, maybe you already have a low mortgage rate – or you are almost done paying off your original mortgage, so refinancing doesn’t make sense.

In this case, a home equity loan with a fixed interest rate can be a good way to draw on some of the equity without refinancing the entire value of your home. You can only borrow what you need and repay it in a shorter time frame.

Another exceptional circumstance may be when you want to borrow a large amount for a short time.

Then HELOC might be your best choice. Remember, installation costs little or nothing. And you only pay interest on your outstanding balance. Therefore, as soon as your need for a loan disappears, you can simply reset your balance and pay nothing more.

#### Reverse mortgage

You may also consider getting a reverse mortgage if you qualify, which means you must be 62 or older.

A reverse mortgage provides a lump sum and income that can be large at retirement. And no monthly payments are required. Instead, the loan amount and interest payments accumulate and are payable only when you die or sell the house. Just keep in mind that they accumulate quickly and you may have a lot less wealth to pass on to your heirs.

Reverse mortgages are less common than they used to be and should be handled with care. If you are considering a reverse mortgage, contact your Department of Housing and Urban Development. advice on the topic

## Benefits of Getting Equity from Your Home

When used wisely, equity can provide valuable benefits. This extra money can help you increase your assets or improve your overall financial condition.

For example, divesting your home equity may allow you to:

• Invest in home improvements that will add value to your home
• Consolidate high interest debt into a single low interest loan
• Coverage of urgent medical bills or emergency family situations

And now is perhaps the best time to use your own capital. Because (at least at the time this was written) mortgage rates remain exceptionally low.

This means that homeowners can finance such large expenses at an affordable cost. Borrowing from home equity can be much cheaper than paying with personal loans or credit cards, for example.

Just make sure mortgage rates remain low by the time you read this.

## Disadvantages of cashing out home equity

Of course, there are downsides to cashing out your equity.

For example, using home equity inevitably requires a new mortgage (be it a refinanced first mortgage or a type of second mortgage). This way, you put your home at risk and could lose it if you delay payments too much.

Plus, if you choose to refinance with a cash advance, you are resetting your mortgage clock.

Let’s say you have an existing home loan for 15 years and you have another 15 years to come. Assuming you refinance your loan for 30 years, you will end up paying for your home in 45 years instead of 30. This means you will pay more interest in the long run.

Of course, you can refinance a new loan for 15 years. But expect significantly higher monthly payments. You can model your own shapes using refinancing calculator

## When does it make sense to take capital out of your home?

The mistake you really want to avoid is to take away equity in your home in order to support a precarious lifestyle. Because if you don’t address the underlying problem of cost overruns, you will almost certainly find yourself in a much worse position sooner or later.

This is especially true if you cash out debt consolidation… Chances are good that you will be saving on paying off your debt every month. But before you do that, create a family budget that matches your outgoing payments to your income. Then decide to stick with it.

There are many good reasons to buy home equity, some of which we have already mentioned. For example:

1. Investing in a new or existing business
3. Covering unexpected medical bills by avoiding more expensive forms of borrowing
4. Investing in your future or your family’s future by paying for education

Then there are the gray areas.

A wedding, a fancy car, or a vacation of a lifetime will not bring you any financial returns. And if you use equity to pay for these things, you will probably still be making payments a few years (or decades) after the great memories are gone.

In general, most financial advisors suggest that you do not use your capital unless you intend to use the money for “good” financially beneficial purposes.

## What are the current mortgage rates when cashing out?

Refinancing rates with cash out are usually slightly higher than refinancing rates without cash out. And those related to mortgage loans and HELOC are a little higher.

The good news is that today’s mortgage rates are still close to record lows. So, even with a small hike in rates, homeowners can get great cash financing deals.

Check your cash eligibility and interest rates to see if it makes sense to use equity for you.