BOK Financial logo
Couple holding sign for first home with mortgage through BOK Financial.

Homeowners taking advantage of record-high available equity

From financing home improvements to paying down debt, what could you do with all that equity?
ByJenna Hardie
September 3, 20215 min read

Homeowners across the United States hit another record high this year: $8.1 trillion in available equity at the end of the first quarter.

With that, the average homeowner now has $153,000 in equity, leading many to consider whether they should tap into those funds. But choosing how to use your equity can be confusing.

"In today's environment where many buyers have more equity in their home, it's more important than ever to make sure they make the right financial decision if they want to borrow money," said Caleb Bigham, director of mortgage capital markets at BOK Financial®.

A home equity line of credit (HELOC) allows the borrower to take out a specific amount of money when needed, based on available equity. The borrower pays interest only on the funds advanced.

A cash-out refinance, on the other hand, allows mortgage holders to refinance their loan and potentially add additional money to the new mortgage loan based on the equity available. The homeowners receive this money in a lump sum of cash to use as they see fit.

Both options can provide the resources homeowners need to meet other financial goals, such as:

  • Making home improvements
  • Consolidating debt into lower interest rates
  • Paying for higher education or other large expenses
  • A combination of the above or more

Making the right decision

While there are several factors that can affect a borrower's decision about which financing option to choose, one way to decide can be based on how you want to use the extra money.

"Educating yourself and choosing a knowledgeable home lending partner to provide consultative advice can make all the difference when you're making a big financial decision that has long-term implications like this," Bigham said.

For example, if you are contemplating an expense of a specific amount and with more certain timing, such as putting in a swimming pool for $50,000, it might make more sense to do a cash-out refinance.

But if you're not sure about the timing or use of your available equity, such as deciding between putting in a pool, remodeling your kitchen or paying down debt, the flexibility of a HELOC may be better for your situation, Bigham said. "There's really no one-size-fits-all answer. What we recommend is finding a lender that will take a consultative approach, ask the right questions, and consider all of that information to help you figure out which product best meets your needs."

Topics
    Subscribe

    Related Content

      Filtering by:
      Cash-out Refinance
      Home Equity Line of Credit (HELOC)
      Benefits
      • Interest rates may be lower.
      • Typically paid over a longer time period (the payments become part of your mortgage payment)
      • Multiple types of loans are available with this process, with various terms and both fixed and variable rate options.
      • Typically fewer, or in some cases no, up-front fees and costs.
      • Take what you need, when (or if) you need it and only pay interest on the amount you borrow.
      • Some financial institutions allow borrowers to convert portions of their adjustable rate HELOC into fixed rate loans so that payments remain stable.
      Drawbacks
      • You pay interest on the total amount of the loan regardless of whether or not you’ve used the cash-out loan proceeds.
      • The timeframe on your mortgage may increase.
      • You may face more up-front fees in the closing costs associated with refinancing.
      • Rates are adjustable, which means your rate may increase or decrease according to designated market benchmarks.
      • Your payment can increase or decrease, potentially creating more risk.
      • Two payments versus one: You have to make your regular mortgage payment and a payment on your HELOC loan.
      • Available HELOC terms are typically shorter with fewer options compared to a cash-out refinance.
      Example

      If a borrower owns a home worth $200,000 and owes $100,000 on a mortgage that was taken out at a higher interest rate than today’s available mortgage rates, that homeowner can refinance at a lower interest rate and can increase the amount of the loan to $130,000, for example, giving them an extra $30,000 in cash to use.

      Note: Typically, the full amount of available equity is not available to borrow against due to the bank's specific equity limits.

      If someone wants to remodel their kitchen for $20,000 and then a few months later wants to repaint their house for $8,000, they can withdraw those specific amounts from the same HELOC at different times and will only pay interest on those amounts.

      How it works
      • The loan pays off your existing mortgage and creates a new loan that may have different terms.
      • Homeowners can take out a lump sum and use it for a wide variety of purposes.
      • Instead of receiving a lump sum of money, you gain access to a line of credit against your current equity.
      • You decide when and how much equity you want to access and pay interest only on the amount borrowed.
      What it is
      • Replaces your existing mortgage with a new home loan enabling you to access the equity you’ve built up in your house.
      • Borrowing against the available equity in your home.

      Start Your Financing Today

      Apply online using the links below or reach out to a Mortgage Banker to answer your questions. Either way, you can expect personal and attentive service to help guide you through each step of the process.

      Apply Online - HELOCApply-Online-Refinance