Despite a very tough stretch for virtually everyone nationwide, homeowners have found themselves with something to celebrate over the past 12 months. As a direct result of booming home equity and rising home values, net worths have been skyrocketing for homeowners everywhere.

Bidding wars amongst homebuyers have become the norm, as rising housing prices fueled by the very pandemic that has brought the world to its knees in many respects have resulted in a home equity boom. There’s a real-estate frenzy going on out there, leading to American homeowners finding themselves sitting on a record $22.7 trillion worth of home equity.

This comes after a massive gain of $2.7 trillion in home equity in the past 12 months, according to Yahoo Finance. It’s a trend that’s leading many homeowners to start thinking about retirement. While some are considering downsizing or taking out a reverse mortgage, many others are pulling the trigger on cash out refinances while mortgage rates are at historic lows.

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Largest Home Price Increase in America in 40 Years

It’s been nearly four decades since America has seen a home value boom like this. And not a moment too soon. Unison, who tracks this data, cites the S&P Index to note that home prices clocked in at 18.6% higher numbers this summer than where they were at just 12 months prior.

With rising home values comes an unbridled surge in home equity. A new gold rush in property values if you will. Even after subtracting mortgage debt, many homeowners have found themselves with thousands, if not tens of thousands of dollars in new home equity. By midsummer, 49 of the 50 largest cities reported a 10% bump in average home equity from last year. Additionally, 46 out of 50 states had median home pricing jumps of at least 10% in under 12 months time.

The top earner in the U.S.? San Jose/Sunnyvale/Santa Clara, California. This metropolitan area is seeing the highest home equity across the board, with their average home values coming in at $1.33 million. San Jose homeowners are averaging nearly a million bucks in home equity ($950,271 to be exact), a number that even blew the minds of the good people over at Unison Research who ran these reports.

Arizona Has Entered the Chat

The biggest increase in home equity does not come out of California. On the contrary, the Phoenix-Mesa-Chandler area has seen the biggest jump in average home equity, as homeowners in this region have enjoyed a bump of 28.7% or $42,112 in home equity over the last twelve months. The average home value in the greater Phoenix area as of today? How does $336,895 sound?

As Unison’s Winfield Xu put it, “Driven by strong housing demand and tight supply, aided by government support and near rock-bottom mortgage interest rates, home prices have not taken a hit during the COVID-19 pandemic. As a result, there have not been many notable decreases in home equity values in large metropolitan areas.”

Whether you want to pull cash out for retirement, for a home improvement project, a dream vacation, or a major event like a wedding or investment property purchase, a cash out refinance at rates hovering between 2% and 3% could be the way to go.

Let’s Talk Strategy

Tapping into home equity is a strategic move that requires a little bit of planning. It doesn’t necessarily mean you’ll want to go big with the cash, or downsize to preserve more, but long term financial planning is always your best bet to safeguard your life savings and really make your money go the extra mile for you.

Now when we say downsize, we’re talking about selling a home or property, buying a smaller one, and saving the difference. Basically you’re liquidating an asset. Folks looking to retire often make a move like this, and it can work really, really well if executed properly. At the end of the day, you always want to be building equity so when you do need to (or want to!) cash out, the payout is one that makes you smile from ear to ear.

And when we’re talking cash-out refi, we’re talking about replacing your current mortgage with a brand new loan. What’s really amazing is right now you can qualify for a lower rate than you probably ever thought possible. Some homeowners are even refinancing into rates under 2%!

Lower Interest Rate and a Shorter Term? Where Do I Sign Up?

There are 30-year, 15-year, and even 10-year refi options, with rates under 3% available to homeowners with solid credit. If you’re taking cash out, your new loan will exceed what’s owed, and the difference goes right into your pocket.

We’re talking lump sum of tax-free money. But keep in mind there are still closing costs, and the equity you built up over time will be tapped into a bit. Committed to staying in your home long term? That equity might build right back up over time, especially if you’re in a great location. Best case scenario, a cash out refinance can be a true win-win.

There are some retirees who take out reverse mortgages. These are similar to cash out refinances in a way (and different in other ways), as they permit older homeowners to access their property’s equity in order to cover expenses or provide additional income. The major difference between cash out refinances and reverse mortgages are in a reverse mortgage, the equity can be paid out to the homeowner in monthly installments, a lump sum, or even as a HELOC (Home Equity Line Of Credit).

Q&A: Is a reverse mortgage right for you?

Reverse Mortgage or Investment Property Time?

If you do go the reverse mortgage route, know this: Your loan won’t need to be paid back unless you pass away or if you move into a different property, making the initial property an investment or vacation home. In the former case, any heirs would ultimately sell the property or alternately they could utilize the funds to pay off the reverse mortgage to keep the home.

Investment properties are an interesting (and potentially lucrative) option. Yes you’ll need to play landlord, but you’ll be opening yourself up to a whole new revenue stream. Own your home outright? Awesome! Do a cash-out refinance, cover any retirement costs, buy a smaller property (even a condo or apartment), and convert your primary home into a cash cow of an investment property!

This way you keep the home, and you can use the rent you’re collecting to cover mortgage payments while stockpiling all the profits. Both properties will now be valuable components of your estate. End of the day, home equity has never been greater, and with refinance rates at historic lows, the time to cash out may never be better than right now.

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