The Coronavirus pandemic has led to a new kind of normal with rising underlying economic instability. Let’s explore why more homeowners are cashing out of houses and what does it mean.
NYC real estate and COVID-19
Due to the Coronavirus, the normal operations of real estate in New York City and daily life in general has changed drastically. In terms of the housing market, there has been a decrease in demand along with sellers pulling their listings from the market, creating an even smaller supply of available homes. Additionally, brokers and real estate agents are forced to adapt to new isolation and social distancing rules by transitioning to virtual tours and 3D home tours in place of traditional in-person home tours.
There have also been a number of home listings in NYC with drastic price drops, which means there could be a potential additional decline in housing prices in the near future due to the pandemic.
If you’re currently a homeowner in NYC then you’ve probably heard of many other homeowners cashing out their houses. So what does cashing out a home mean exactly and is this a good idea for your current situation?
Home refinancing vs. home equity loans vs home lease back
To start off, what does refinancing your home mean? Refinancing a mortgage means you replace your existing home loan with a new one for the same amount, but with a lower interest rate or shorter loan period or both. Generally, it’s a way for you to be able to pay off your loan within a smaller time period and have a lower overall total payment compared to the original amount. However, there are a few options homeowners have in order to combat low cash flow during this pandemic. The options we will talk about is cash-out refinancing, home equity loan, and a home leaseback.
Cash-out refinancing is when homeowners can withdraw a portion of their home equity in a lump sum. To do this, homeowners replace their existing mortgage loan with a new one that’s higher and they keep the difference in cash. Most of the time, the maximum amount you are able to withdraw is limited to no more than 80% of your home’s value. This is a good way to create cash flow if you are currently struggling to make ends meet. This particular refinancing is a popular way many homeowners are now using to cash out their homes.
Home equity loan
A home equity loan is essentially a second mortgage where homeowners borrow against the equity of their home. It’s similar to personal loans where homeowners are able to get a lump sum with a fixed interest rate and fixed monthly payments. In this sense, home equity loans are good because interest rates won’t ever increase and there is a set end date to when the loan will be paid off due to the fixed monthly pay.
A home leaseback is very different compared to the cash-out refinancing and home equity loan. This is because a leaseback is a reverse mortgage where the homeowner sells their home, cashes out on all their home equity, and then rents their home back from the investor they sold it to. Essentially the homeowner becomes the renter and no longer owns the house. However, depending on the service used, they still have the rights to buy back the property later on.
Should you refinance your home right now?
If you’re struggling due to Coronavirus setbacks, should you refinance your home and what are the risks of cashing out your home? Due to low interest rates right now, many homeowners are cashing out their homes. This is because mortgage rates currenting is below 4% so cash-refinancing could be a great option. Additionally, many borrowers are taking advantage of these low rates as the COVID-19 pandemic is pushing mortgage rates even lower due to fears about a worldwide recession.
While it can be an attractive option, a cash-out refinance is not to be taken lightly and borrowers have to be mindful of what they use the money for and if it’s right for their situation. For instance, it could make more sense for home improvements or paying off high-interest debt, but not for everyday spending or splurging. Homeowners must also keep in mind if they’re able to afford the monthly payment and the potential for their home to decline in value which results in them owing more than the house is worth.
It is important to note that many listings in NYC have already experienced price drops. These price drops have occurred in all five boroughs with the largest decline in listing prices occurring in Manhattan with Brooklyn coming in second. While the decline in prices are a good thing for potential buyers, it can be bad news for homeowners looking to refinance their home. This is because it means their property may potentially decline in value due to this pandemic. While experts believe a large drop on value will not occur for the housing market, it’s not a definite thing and many are unsure about the potential future effects Coronavirus will have on the market.
If the Coronavirus pandemic has put you in a less than ideal financial situation, cashing out of your home could be an option to consider. However, it is important to keep an eye out on how the pandemic is affecting the housing market and look through all your loan alternatives to determine which one is the best for you!
While you’re stuck at home for the indefinite future, enjoy your time admiring your dream home on Localize, or even apartment hunt for a potential move after life returns to normal! As always, stay safe, stay healthy, and happy house hunting!