Home equity is surging — here's why now is a 'great time' to refinance
Written by
Writer, Fox Money
Rebecca Lake is a Certified Educator in Personal Finance and has spent more than 10 years of experience covering student loans, credit, and investing. Her byline has been featured at Forbes Advisor, LendEDU, The Balance, and SoFi.
Updated October 16, 2024, 2:47 AM EDT
The coronavirus pandemic has created opportunities in the housing market as interest rates reach near-historic lows and demand outpaces supply. Mortgage applications jumped 4.6% through the first week of October and home values are up 5.1% year over year, according to Zillow.
Homeowners are seeing an unexpected but welcome side effect in the form of rising home equity. According to CoreLogic, home equity increased by $620 billion in the second quarter of 2020. That's an average gain of $9,800 per homeowner. If you're interested in buying a home now, rising home equity and low mortgage rates make conditions favorable. Here's what you need to know about home equity's recent surge — and how to take advantage of it.
What is home equity?
Home equity represents the difference between a home's value and the value of any outstanding mortgage loans. If, for example, you own a home that's valued at $350,000 and you owe $250,000 on your mortgage, you'd have $100,000 in equity in the property.
Why is home equity rising?
Michael Foguth, founder of Foguth Financial Group in Brighton, Michigan, said the increase in equity is linked to rising home prices. That claim is supported by CoreLogic's data, which shows home prices rising 4.3% through June.
Most mortgage lenders look for at least 20 percent equity — a number that should, hopefully, be attainable for many homeowners right now — before approving a mortgage refinance. To see if you qualify for a mortgage refinance right now, you can simply enter some personal finance information into Credible's free online tools.
HOW MUCH EQUITY DO YOU NEED TO REFINANCE YOUR MORTGAGE?
Is it a good idea to refinance my mortgage now?
There's an opportunity to be had if you already own a home. You just need to refinance your mortgage.
"Now is a great time to do a refinance or a cash-out refi," Foguth said. "As a refinance at a lower, long-term rate could prove very beneficial."
HOW TO REFINANCE YOUR MORTGAGE
If your home's equity has increased, you might have a larger well to draw from if you're considering a cash-out refinance. You could use the money to make home improvements or repairs, further increasing your home's value.
Refinancing now could also mean getting ahead of the Federal Housing Finance Agency's adverse market fee, which is expected to take effect December 1 and add $1,400 on average to the cost of a refinance loan.
WHY IT'S A GOOD IDEA TO REFINANCE YOUR MORTGAGE WHILE RATES ARE LOW
Is it a good idea to shop around for a mortgage now?
The relationship between home equity and mortgage rates that's currently playing out in the housing market offers a strong incentive to purchase a home for qualified borrowers.
"Throughout the pandemic, home prices have increased while interest rates are so low, which has given homebuyers the ability to afford more of a home," Foguth said.
Lower interest rates for mortgages means buyers have more purchasing power. Qualifying for the best rates, however, means having a strong credit history and credit score. But assuming you can check off the boxes and you have a consistent income, the current lending environment could offer mortgage savings.
Before buying or refinancing, consider what your monthly payments might be. Using an online mortgage calculator or a mortgage refinance calculator can help you estimate your monthly payments with a new loan.
SHOULD YOU PAY POINTS TO LOWER YOUR MORTGAGE RATE?
Why are home values rising?
The spike in home values and home prices is largely a byproduct of an imbalance between supply and demand and mortgage rates that continue to hover near record lows.
According to Zillow, the total for-sale inventory was 35.7% lower through the first week of October compared to the previous year. Meanwhile, time on the market is down to just 13 days, a period that's 15 days shorter than it was a year ago. Lower interest rates are also helping spur demand for mortgages.
GET THE BEST INTEREST RATE BY FOLLOWING THESE 5 STEPS
Today's mortgage rates
According to Freddie Mac data for the week of October 15th, mortgage rates hit another all-time low for the 10th time this year.
The rate for a 30-year fixed-rate mortgage was 2.81% while the rates for 15-year fixed-rate mortgages was 2.35%. The 5/1 adjustable-rate mortgage (ARM) rate came in at 2.9%. These trends can be linked to a slowdown in the economic recovery.
Based on the current mortgage and refinance rates, it may be a good time for you to refinance. To see how much you could save on monthly payments today, crunch the numbers and compare loan rates and mortgage lenders today.
HOW TO LAND THE BEST MORTGAGE AND REFINANCE RATES
When will mortgage rates increase?
While the Federal Reserve doesn't set mortgage rates, mortgage lenders can take their cues from changes to the federal funds rate. The Fed's current policy of keeping interest rates low could continue through 2022, suggesting that mortgage rates will remain low through fall 2020 and beyond.
Demand for homes will stay high, Foguth said, as long as most Americans stay employed. Along with credit scores and credit history, lenders also check income and employment status to approve borrowers for a home loan.