American homeowners are sitting on a record amount of home equity, but taking advantage of the extra cash becomes more difficult as interest rates rise.
Now rates have ticked above 3% and are expected to rise further as the Federal Reserve slows its purchases of mortgage-backed bonds. As rates rise, a cash-out refinance becomes less attractive because a lot of borrowers would have to refinance to a higher rate than they currently have. So borrowers can draw on that line of credit for, say, 10 years, but then after that period they have to start paying the money back. They do have to pay interest on the money they take out during the draw period.
Sometimes it does make sense for borrowers to do a cash-out refinance of their primary mortgage, even if the rate they get is higher than the rate they currently have. "I would recommend a line of credit when the financial need is short term and there is a defined plan in place to pay it off over the next 24-to-36 months," Weaver added. "The advantage of the line of credit is that it is flexible and low upfront cost, however the disadvantage is that most carry a variable interest rate that will change and likely increase over time."
DiMartinoBooth can’t wait for the data to reflect how much of this tapped home equity was lost in the stock market over the next several months. This will be the real crisis.
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