By Gregory Schmidt | The New York Times (abridged)
Hoping to avoid refinancing their mortgage in order to hang on to their low rate, many request a new line of credit using their home equity as collateral, but the math never works out because the rates on most home-equity lines are too high.
Homeowners who secured mortgage rates as low as 3 percent just a few years ago are reluctant to sell their homes. They have built up an average of $310,500 in home equity, according to a recent report by Cotality, a housing market data provider.
“That equity provides an important financial cushion as everyday costs continue to rise,” Selma Hepp, Cotality’s chief economist, wrote in the report.
That enormous wealth comes with a caveat: Because it is tied up in their homes, owners have to refinance their mortgage to take advantage of it. Still a home loan at 6.69 percent — the average rate for a 30-year, fixed rate mortgage, according to the mortgage finance giant Freddie Mac — is a better option than credit card debt with an interest rate in the double digits, financial experts say.
“Nobody really talks about their credit card rates being 23 percent,” said Alex Elezaj, the chief strategy officer at United Wholesale Mortgage, a mortgage lender that works exclusively with independent brokers. “They are paying minimum payments, and they kick the can down the road.”
But as revolving debt mounts, he is seeing more homeowners looking to refinance their mortgage. To be sure, sometimes the money goes to renovating the home or paying for a vacation, but more often, he said, it is used for credit card or student loan payments.
“Most people are looking at it as a way to bring down their overall household interest rate,” he said.
Financial brokers are seeing more refinancing activity across the country, as more people seek to pull themselves out from under a pile of bills.
The average debt per cardholder grew 22.7 percent from 2018 through last year, to $7,161, according to a report from the Century Foundation, an independent think tank. (For comparison, cumulative inflation in the same period rose 28.2 percent.)
But Stacey Melton, a broker in Gilbert, Ariz., said the people who come to her for help carry an average of $20,000 to $50,000 in credit card debt, and sometimes as high as $90,000.
Hoping to avoid refinancing their mortgage in order to hang on to their low rate, many request a new line of credit using their home equity as collateral, but the math never works out because the rates on most home-equity lines are too high.
“You are basically trading apples for apples at that point,” said Ms. Melton, who recommends refinancing, even if the homeowner snagged an ultralow rate when buying the home.
But as more Americans use their homes as emergency slush funds, [Darryl Fairweather, the chief economist at Redfin] worried that the activity could put them at risk if the economy starts to tumble.
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