Is it too late to refinance? With mortgage rates on the rise, here are your options – CNBC

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Housing prices have seen an all-time high, and the amount of home equity is at an all-time high too. Thanks to skyrocketing housing prices, the amount of home equity is now at aminimum it’s ever been. It’s thanks to the pandemic that homeowners are able to build wealth. The opportunities still exist, even though they are getting harder to come by..

In the third quarter of the year, homeowners had $9.4 trillion of equity to draw down, the highest sum ever recorded as per the most recent data released by Black Knight, a mortgage research and technology firm.

For the typical homeowner, that’s close to $178,000 of equity that’s available to be tapped before reaching the maximum ratio of loan-to-value of 80 percent, according to Black Knight Data & Analytics President Ben Graboske. Most lenders will require you to maintain at minimum 20 percent equity in your house, if not more as a buffer in the event that home prices drop.

Making the most of that cash it becomes increasingly difficult as rates of interest rise.

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The mortgage rates are already trending upwards, due partly, to inflation as well as the Federal Reserve.

Recent inflation figures recorded their highest levels for many years. In the Consumer Price Index, which tracks the cost of a diverse range of products and services increased 6.8 percent from year to year this was the highest level since June 1982.

In reaction in response, the Fed announced it would reduce its economic assistance faster than expected and with Fed officials expecting up to three rate increases in the coming year. Two in the coming year, and two more in 2024.

That’s causing long-term fixed-rate mortgage rates to climb. In the past, the average rate for a 30-year fixed mortgage is now 3.33 percent, which is approximately half a percentage more than it was a one year earlier.

“With higher inflation, promising economic growth and a tight labor market, we expect rates will continue to rise,” said Sam Khater, Freddie Mac’s chief economist.

At the end of 2022 the average interest rate for mortgages could reach 4percent, according to Jacob Channel, senior economic analyst at LendingTree.

“There is still time for people to tap into their home equity with either a home equity loan or a refinance,” the economist said. But, “the window of opportunity is closing.”

The best way to tap into your home to earn cash

If interest rates are low refinancing with cash-out is a great option. Homeowners are able to refinance their existing mortgage, or take out larger mortgages and lower the amount of interest while at the same time.

Even today, those with good credit can receive a rate of less than 3 percent.

“If you can get it in the next few months, hopefully before summer, you might still be able to find a really good deal,” Channel explained.

The homeowners may also be eligible to deduct the interest paid on the initial $750,000 of the mortgage if the cash-out proceeds can be used for major improvements. Since fewer individuals currently itemize deductions on tax returns, the majority of households won’t be able to benefit from this deduction.

A Home Equity Line of Credit or HELOC that is a revolving line credit that has better rates than credit cards can be a different way to take advantage of the equity you’ve built up inside your residence.

The typical interest rate for this kind of credit is about five percent. Credit cards cost around 16% in the average.

There were fewer banks that offered this option at the time of the Covid epidemic, as banks tightened their standards to lower their risk. The availability of HELOCs has improved, however the most favorable terms are for borrowers with higher credit scores and lower debt-to income ratios.

The decision whether to refinance your cash out and HELOC will be based on the amount of equity you own in your house and the timeframe as per Christian Wallace, head of Real Estate Services at mortgage firm Better.

For instance, if you’re looking for a short-term commitment but don’t have as much equity then the HELOC could be a better option. Also, if you’re able to refinance your loan and lower the interest rate by a minimum of one-half of a percentage point, it could be a good idea to cash out for you.

“Every situation is going to be different,” Wallace declared.

Remember that different lenders provide different terms and rates, she explained. Wallace suggests speaking with the minimum of three mortgage firms or loan representatives and taking into account all costs before choosing the one that is the best option for you.

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