Why Increased Equity Creates New Opportunities for Homeowners with High Rate Mortgages

As property values continue to climb in 2019 to new highs not seen in years, the equity that homeowners have in their property continues to increase. But as property values rise, interest rates have generally climbed as well. Rates have nearly touched 5% in recent months but have retreated to the 4.5% range in early 2019.

If you have a higher interest mortgage and growing equity, you may wonder how you can use the funds in your home to your advantage. This article intends to clear some of that up for you.

The Power of High Equity and What to Do with It

As home prices have risen, you may have noticed your home equity rising nicely. But if you have a high interest first mortgage, you may want to think about how to take full advantage of the equity in a way that reduces your rate.

The wisest move in many situations is to do a cash out refinance on your first mortgage. This could be a viable option if you have a mortgage rate above 5% or especially 6%. With a cash out refinance, you may be able to reduce your interest rate and get that cash out.

Why would you want to take the equity out of your home? The wisest reason to do this is to pay for home improvements. In a rising property value environment, paying for home improvements can at least partially pay for themselves. Improving the home can lead to a higher value and can cause your equity to build back up more quickly.

Many home owners with higher rates and high equity do a cash out refinance, get a rate up to 1% lower, pull out cash, and still have a payment that is about the same as it was before.

What You Can Do with Your Home Equity

Let's say you have a house worth $250,000 and you owe $80,000 on the home. You look at current rates and find you can get a lower rate if you refinance. You also will be able to free up some of that cash to remodel the home. In this case, you could refinance the home for more than the $80,000 you owe. If you want to pull out $50,000 cash, you may refinance the loan for $130,000. This is the $80,000 you owed plus $50,000 cash.

Of course, you have to show the lender you can afford the higher payments and qualify for the loan. This means providing the regular documentation for a home loan, such as income, debts and assets.

What are some of the best improvements to consider with your equity? According to Nerdwallet.com, these areas should be the focus of your hard-earned equity after a cash out refinance.

Make More Attractive

Increasing the value of the home is largely about enhancing curb appeal. This is the first chance to make a good impression on people. The exterior of the home needs to make a good impression to improve value and to attract buyers in the future.

First, be sure the landscaping is in good shape. Take care of the grass, trim trees, add flowers. Also, taking out that weathered, 20-year-old front door and putting in a new one makes a great impression and adds value.

After the exterior is in good shape...

Take on the Kitchen and Bathroom

Any time a kitchen is outdated, this will always decrease the value. Home shoppers usually go straight to the kitchen to see how updated and user friendly it is. And you don't have to spend $50,000 on your kitchen upgrade. Current statistics show that a minor kitchen upgrade with new counters, cabinets and commercial grade appliances can return 80% of your investment. That need not cost more than $15,000 or $20,000.

With bathrooms, the same holds true. A midrange remodel, such as a new floor and some updated fixtures will give you a 70% return. For a couple grand, you can make a big impression on your future buyer and really add value.

Low Maintenance

Some buyers will be concerned that a home with older major items will need repairs. It can be wise to spend your equity on replacing the AC, water heater and the roof. These may not add as much value, but they will definitely make it easier to sell.

Increase Efficiency

Any energy conservation feature you add on your home will increase value. It is reported that installing energy efficient windows can return 75% ROI. It's even better if you can prove to prospective buyers that you have significantly cut your energy costs. Also consider adding an energy efficient air conditioner, especially if you live in warm weather states such as Texas or Florida.

Increase Square Footage

Boosting the square footage of the home has a big impact on value. A bigger home will command a higher price, so think about expanding that family room or adding a bedroom if you want to really boost the home's value.

With your increased equity and higher interest mortgage, you will have the opportunity to kill two birds with one stone – do a cash out refinance, get a lower rate, and get the equity you need to really increase your home's value in a time of rising values. You really could turn out to be a financial winner in the long term.