Real Estate Archives - Spectra Mortgage

The Federal Housing Finance Authority (FHFA) recently released data on the amount of home equity held by homeowners in the U.S.

Homeowner equity refers to the difference between a home’s current market value and the current balance of all mortgages on the home. (For example, if a home has a current value of $500,000 and a mortgage of $250,000 the owner has $250,000 of equity). Home equity is owned by the homeowner and is an important asset that can potentially be used by the homeowner to:

As of April 2023, over 83% of homes with mortgages had equity of 30% or more. This is the highest percentage of homes with greater than 30% equity in the past 10 years. This trend is consistent with home price appreciation during this period. A large percentage of homeowners that purchased or refinanced their home prior to July of 2022 have significant appreciation in their home.

It is noteworthy that less than .2% of all homes with mortgages have negative equity. This is the lowest level of homes with negative equity since 2013.

(Source: National Mortgage Database (NMDB) Aggregate Statistics, Federal Housing Finance Authority)

When approaching or reaching retirement it is common for homeowners to sell their current home to accomplish one or more of the following objectives:

Sell the current home and use the the proceeds from the sale to pay cash for the new home. No mortgage and no mortgage payment on the new home.

For example, the homeowner sells the current home and receives $300,000 after expenses and paying off the mortgage balance (if any). They then purchase a new home for $300,000, or less, for cash.

The old strategy has two limitations. First, the homeowner is limited on the purchase of the new home by the amount of cash they receive from the sale of the old home. Therefore, if the new home costs more than the cash they received (in the example above, $300,000) they will need to come up with additional cash or they will need to get a mortgage and make monthly mortgage payments . The homeowner may not have additional cash and may not want, or be able to afford, monthly mortgage payments. This means relocating/downsizing may not be feasible if the new property is going to cost more than the old property.

The other limitation of the old strategy is that in today’s real estate market the homeowner will most likely use all the cash proceeds which will then be tied up in the new home. Once used to purchase the house it is difficult to access this equity in the future without incurring substantial fees, a monthly mortgage payment, and the need to qualify for a mortgage or line of credit. Even if the homeowner is able to spend less than $300,000 on the new home they will still tie up more money in the new house than required in the new strategy outlined below.

Sell the current home for $300,000 and obtain a Home Equity Conversion Mortgage. This mortgage (sometimes referred to as a reverse mortgage) is guaranteed by the Federal Housing Authority (FHA) which is a part of the U.S. Department of Housing and Urban Development (HUD).

Purchase a new home for $300,000. Use $150,000 from the sale of the current home and get a Home Equity Conversion Mortgage of $150,000 (These numbers are an illustration. The amount available on a reverse mortgage will depend on the age of the homeowner, the value of the property and current interest rates. The amount available on a reverse mortgage generally ranges from 35% to 65% of the value of the property).

The Home Equity Conversion Mortgage does not require monthly payments for principal and interest is not required to be paid off until the homeowner moves and/or sells the property (the homeowner can make payments at any time if they choose). Under the illustration for option one the owner retains $150,000 in cash that they can use for other purposes or keep in reserve.

Combine $300,000 cash received from the sale of the current home with a Home Equity Conversion Mortgage of $200,000 to purchase a new home for $500,000. The Home Equity Conversion Mortgage does not require monthly payments for principal and interest and is not required to be paid off until the homeowner moves and/or sells the property (the homeowner can make payments at any time if they choose).

With option two the homeowner is able to use the proceeds to acquire a more expensive house if necessary or desired without having to assume a monthly mortgage payment.

The strategy outlined above allows the homeowner to more effectively utilize their equity in the following ways:

In order to be eligible to take advantage of the opportunities presented by Home Equity Conversion Mortgaes at least one of the homeowner must be 62 or older (if married) and the house must be the primary residence. The options outlined above are only one feature of a Home Equity Conversion Mortgage-there are many other benefits and planning opportunities that they can provide. Find out if they you or a family member or friend could benefit from a Home Equity Conversion Mortgage by calling Wayne Tucker at 303-468-1985 or emailing him at wtucker@spectramortgage.com

Your home equity represents the current market value of your home minus the liens (mortgages) that are attached to the property. Home equity increases when the value of the home increases and when mortgage principal is paid that reduces the mortgage balance. In a sense, home equity represents savings that the homeowner has accumulated. Home equity decreases when the value of the home declines or when a homeowner takes out a loan against the property. When a homeowner uses their equity, they have made a financial decision to achieve a financial goal or objective today rather than wait to utilize it a later date (such as when they sell the property). Many people believe that they cannot or should not use their home equity. First, a homeowner can access and use their home equity when and how they choose subject to qualification guidelines. Secondly, the question of whether a homeowner should use their housing equity to meet financial or non-financial needs is an individual decision that is unique to their circumstances. There are good uses of home equity and there are certainly poor uses of home equity. The key point is that home equity is an asset of the homeowner (for many it is their largest asset) and can be used by the homeowner for any purpose they choose. After all, it is their money. Among the reasons people choose to use their home equity are the following:

Obtain a mortgage with better terms and/or a lower payment
Obtain cash to meet a financial obligation or need
Make home improvements
Pay off other debt with high payments and interest
Make investments that may provide a better financial return
Meet educational expenses for children
Meet medical or long-term care expenses
Establish an emergency fund

Because the interest rate on any borrowing association with a home is lower than the interest rate on a credit card, a car loan, or other personal loans, using home equity can have significant benefits compared to utilizing any other type of borrowing. Additionally, utilizing home equity can be a more effective and tax-efficient way to access needed funds than withdrawing funds from a savings account, an investment account, or a retirement account. Lastly, a unique benefit of using home equity is that borrowing against home equity is not subject to income taxes and the interest paid on any type of home equity borrowing can be tax-deductible under certain circumstances. Home equity management refers to the process of using equity extraction via loan at favorable and tax-advantaged interest rates to invest or manage cash flow in manner that offers higher returns and cash flow. Following are the most common strategies to access home equity:

Rate and Term Refinance
Cash Out Refinance
Home Equity Line of Credit
Fixed Home Equity Loan
Home Equity Conversion Mortgage

Each of the above strategies have pros and cons and may not be appropriate in some circumstances and may not be suited to all homeowners. However, when used correctly they each can provide significant benefits. For example, with a Home Equity Conversion Mortgage monthly payments are optional and there are unique features that can benefit married individuals who are over the age of 62. As stated earlier there are many financial and non-financial reasons why a homeowner may want or choose to use the equity in their home. Our role as mortgage advisors is to help our clients understand the options that are available to them if and/or when they want to determine if using their equity is right for them. We work with them to explain the pros and cons of each option and provide the information that they need to determine whether utilizing their home equity, their asset, is a good financial option.