Over the past couple of years, homeowners have realized record equity gains in their homes. Lower interest rates have helped borrowers pay their mortgage balance down more quickly. In addition, property values have seen record increases since 2020. According to Black Rock, in the first quarter of 2022, the average homeowner is sitting on a record $185,000 in tappable equity.
What is Tappable Equity?
Tappable equity is the cash that a homeowner can pull out with a new mortgage. The cash can be used for multiple purposes. The cash can be used for debt consolidation, home improvements, paying for education, purchasing another property, or other investment purposes.
How Much Equity is Available to Me?
Typically, lenders will allow you to take a combined total of 80% of your property’s current appraised value. The 80% balance will pay off any existing mortgages and cover any applicable closing cost. The remainder is your cash back.
Here are a few examples:
Example 1
A home has a current appraised value of $450,000. There is a current mortgage with a balance of $290,000.
$450,000 x 80% = $360,000 – $290,000 = $70,000
$70,000 – $3,000 (estimated closing costs) = $67,000 net cash back
Example 2
A home has a current appraised value of $335,000. There is a first mortgage with a $155,000 balance and a 2nd mortgage (home equity line) with at $17,000 balance.
$335,000 X 80% = $268,000 – $155,000 – $17,000 = $96,000
$96,000 – $2,500 (estimated closing costs) = $93,500 next cash back
Example 3
Home has a current appraised value of $565,000. The home is owned free and clear.
$565,000 x 80% = $452,000
$452,000 – $4,000 (estimated closing cost = $448,000 net cash back
The examples above show the equity in your power tool. It is a tool that should be used to your advantage.
Great News About the Tappable Equity in Your Home!
The cash that you take out of your home in the form of a refinance is tax-free. It is tax-free makes it one of the best investment tools available. Unlike income, the cashback received from a refinance is not taxable. In a standard tax bracket, between federal tax, state tax, FICA, etc. it would take nearly $95,000 in gross W2 income to net $67,000.
Looking at it in that light, the return on investment is significant. That type of return offsets a higher interest rate. If the cash-out is used to pay off higher rate/ payment consumer debt the return on investment is even more impressive. If the cash out will be used for home improvements, the interest rate on the mortgage will nearly always be lower than a personal loan or a store card.
Now is a great time to consider further exploring your maximum cash-out options.