How Can I Access My Home Equity During the Coronavirus?

Apr 8, 2020
How Can I Access My Home Equity During the Coronavirus?

The coronavirus is having a devastating effect on people’s finances. Statistics show that the unemployment rate is already around 13%, the highest it’s been since the Great Depression, and it’s expected to soar much higher by the time the crisis has passed. 

If you’re worried about your ability to pay bills, you’re not alone. However, you do have options, especially if you have equity in your home.

According to a 2019 report, homeowners have an average of $140,000 in equity available to tap. It’s still available to you even during the current crisis.

Coronavirus Home Equity: Access Options for Homeowners

Coronavirus home equity is the same as regular home equity, and you still have the same access options. However, each option has been affected by the current economic crisis.

Most importantly, the Federal Reserve recently reduced interest rates to between 0% and 0.25%. This decision stemmed from the desire to reduce the burden on borrowers and also from the need to keep the economy as active as possible given current levels of uncertainty.

Extremely low interest rates and rampant financial insecurity might convince you to borrow against your equity. Here’s what you can expect the process to look like, depending on the method you select.

HELOCs

A HELOC is one of the most flexible options you have of tapping your home equity. Formally known as a home equity line of credit, a HELOC works a lot like a credit card. 

When you get approval for a HELOC, your lender will tell you the amount that you’re eligible to borrow. It will almost always be less than 85% of your home’s total appraised value. 

You can draw what you need, up to your limit, throughout the loan’s draw period. After the draw period ends, you begin making payments on what you borrowed.

A HELOC is more flexible than many other options for tapping your equity. You don’t have to borrow more than you need, so you have some control over the amount you’ll have to pay back. In uncertain times, that is a major asset.

Unfortunately, it’s tougher right now than usual to qualify for a HELOC. Banks are inundated with loan requests looking to cash out equity, and many are tightening approval requirements to control risk. If you don’t fit the profile of a reliable borrower, you may have trouble finding a willing lender.

Home Equity Loan

The borrowing climate affects home equity loans in much the same way as it affects HELOCs. Interest rates are extremely low, but lenders are tightening restrictions to deal with a rush of applications.

Because conditions are so similar, deciding between a home equity loan and a HELOC will be nearly the same challenge as before. A home equity loan has a lump-sum payout, so you’ll get the amount you applied for all at once. It’s not as easy to borrow what you don’t need. 

That said, if you overestimate how much equity you want when you file your initial application, you may saddle yourself with unnecessary amounts of debt.

Cash-Out Refinance

Lenders are also reporting a massive influx of homeowners applying to refinance their mortgages. For the week ending March 6, the number of applications was 79% above the number of the week before.

A cash-out refinance can still be a smart way of getting your equity because you’re trading one mortgage for another. But remember, as with home equity loans and HELOCs, lenders have become strict about qualification guidelines. If you’ve lost your job or are at risk of losing it, you might have a hard time getting approved.

Keep paying your bills on time so your credit score stays as high as it can be. Apply with several lenders to give yourself the best chance of approval.

If you're approved, be careful to not borrow too much. Over-borrowing invites a strain on your finances, and that’s dangerous in an uncertain economic climate. Furthermore, if home values drop and you’ve borrowed too much of your equity, you could end up owing more than your house is worth

Selling Your Home

Selling has always been the safest way to cash out your equity. You get the money in your pocket without an obligation to pay it back and, if you hire a good agent, it can be a fairly smooth process.

The trouble with selling your home during coronavirus is finding another place to live. The volume of listings for sales and rentals are both down as people follow recommendations to shelter in place. 

The good news for possible buyers is that the prices on new listings are lower than they were last year at this time. With interest rates also down, you may be able to find a good deal on a new home, but finding that home won’t be easy.

Sell and Stay

Selling your house to get your equity may be financially safe, but it’s not the safest option health-wise during the COVID-19 crisis. Fortunately, thanks to EasyKnock, you can sell your home, access your home value with no borrowing responsibilities, and still “stay home” as recommended.

The solution is EasyKnock’s Sell and Stay program, an alternative option that allows you to sell your property and remain in place as a tenant. As long as you keep paying rent according to your sale-leaseback agreement, you can stay until you’re ready to buy back your property or move.

You don’t even have to think about that decision until the crisis has passed.

The Takeaway

Thinking about how to tap your home equity is smart when you’re worried about paying, but think carefully about how you do it. Consider the possibility that interest rates will go up after the crisis passes. Ask yourself if your income will be stable enough to handle loan payments.

Keep in mind that if you borrow against your equity and default, you could lose your home—and that’s not something you want to risk, especially during a pandemic. Sell and Stay is a much safer option that allows you to keep yourself and your family safe until things get better.