How to fight inflation and higher interest rates with your home equity
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November 22, 2022

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Your home equity is an asset in many ways. But did you know that it could be your answer to combat high-interest rates?

You’ve probably heard about rising rates and inflation but how will they affect your situation?

We’re going to break down how to tap into your existing home equity to help you, whether you’re looking for another home or refinancing. 

Let’s get started on the basics so that you can start using your home equity to your advantage.

Ready? Let’s GO!

What is home equity and how does it work?

Home equity is the amount of your home that you actually own or how much you’ve paid into your mortgage principal payments. 

It refers to the current market value of the home, minus what is still owed on your mortgage loan. 

The value of your home can decrease and increase over time as it’s susceptible to many factors.

A few factors that could impact your home’s current market value can include:

  • Your home’s condition
  • Amenities or additions that would appeal to buyers
  • Neighbors’ home values
  • Surrounding area’s appeal to buyers
  • Number of available homes in your area

The two main ways you can build equity are by first, paying your monthly mortgage payments over the years and increasing the amount of your ownership.

Another way you can build equity is by putting down a larger down payment when you purchase your home. In that scenario, you start with some significant equity right from the beginning, whereas a smaller down payment equates to less upfront home equity.

How to access your home equity

There are two main ways you can tap into your home equity:

  1. Conventional refinance mortgage
  2. Cash-out refinance mortgage

Conventional refinance

A conventional refinance mortgage is generally used to lower monthly mortgage payments. A refinanced mortgage means that your existing loan is now replaced with a new one.  

It’s similar to a traditional mortgage in the sense that you take out a predetermined amount and that amount is based on your home equity and finances.

Cash-out refinance

A cash-out refinance mortgage is when borrowers can get a new mortgage for a larger amount than their original and receive the difference in cash at the end of the process.

How much cash you may receive depends on your home’s equity and how much you owe on your current home mortgage. But typically, you can access up to 80% of your home’s available equity. 

What do higher interest rates mean?

No matter what type of loan you take out, you’re going to have to pay interest. 

Higher interest rates will mean you, the borrower will pay more in monthly mortgage payments for your home in interest payments. 

So, when interest rates rise, it may be harder to obtain an affordable mortgage loan. However, remember that mortgages are expected to be paid off over a longer period of time, averaging 15-30 years.

Your credit score is a big indicator of the interest rate you’ll receive. Generally, the higher and healthier your credit score, the better and lower your interest rate will be. 

If you’re able to put more down on your home upon purchasing, then you may also qualify for a lower interest rate.

A big benefit to refinancing your mortgage is to lower your interest rate. 

Use a mortgage refinance calculator to accurately determine your expected interest rate and monthly mortgage payments, depending on your current mortgage.

While this calculator gives you a great starting point, it’s always best to meet with a lender who can review the other factors, like your income and credit score, to give a more accurate estimate.

Who is most hurt by inflation?

Inflation occurs when the costs of goods and services rise, causing the amount of purchasing power or affordability to decrease.

When inflation occurs, the cost of living increases as well, and those with lower incomes will face more hardships than those with higher incomes. However, inflation can harm the entire economy.

As most goods and services costs increase during inflation, then so will the value of your home.

If you have a fixed interest rate, then your home’s value increases while your mortgage rate will remain the same, so those with a fixed interest rate on their home mortgage will be protected from incurring higher monthly costs.

You can rest assured that you’ll have fixed monthly payments and will also reap the benefit on the increase in your home equity.

Is it a good idea to use your home equity?

Common scenarios when it may be a good idea to use home equity include:

  1. When you are looking for a new monthly mortgage payment with better interest rates and terms 
  2. If you need to access cash for home improvement projects, debt consolidation, or other big expenses 
  3. If you want a credit line available for larger purchases
  4. Unexpected expenses

Before using your home equity, you should ensure you can comfortably afford whichever loan you choose. In the event of a refinance, lenders offer a three-day cancellation rule in which you can back out. 

If you’re ready to take the next step, speak with a mortgage lending professional at GO Mortgage who can help answer any and all questions.

They can help determine if using your home equity would be beneficial and which loans would best fit your needs.

GO Mortgage can help

GO Mortgage has several options available to tap into your home equity and we’re ready to help you. 

Our professionals have the experience to help you obtain your goals, no matter your stage of homeownership or comfort with and knowledge of refinancing.

Our team will help you with a loan that fits your situation, whether you’re purchasing a home, a second property, or refinancing. Reach out to GO Mortgage today.

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