Boston Homeowners Could Save $20,000 When Cashing out Equity

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• About 740,000 metro Boston area homeowners have $139.6 billion in equity they can tap at affordable rates for home improvement projects or to pay off high-interest debt
• Home values in the metro Boston market have increased by 48% since 2012, bringing average “tappable equity” per home to $189,000.
• Cashing out home equity without comparing actual mortgage interest rates could cost homeowners $20,000 or more in unnecessary interest charges

Rising home values mean 740,000 homeowners in and around Boston can tap the equity they’ve built in their homes to finance home improvement projects at affordable interest rates, or pay off high-interest debt like credit cards or student loans.

With home values up 48% from their February, 2012 bottom, these homeowners now have an average of $189,000 in “tappable equity.” That’s the amount of cash they can access while still retaining an ownership stake of at least 20% in their homes.

Although interest rates are once again on the rise, mortgage rates remain low by historical standards, and a growing number of homeowners are tapping their equity through cash-out mortgage refinancing.

But research by Freddie Mac shows most borrowers take out a mortgage without getting actual rates from multiple lenders, putting them at risk of paying lenders thousands in unnecessary interest charges.

Even a quarter point interest rate reduction on a typical $400,000 30-year mortgage refinance can save a Boston area homeowner more than $20,000 over the life of the loan.

How Boston stacks up to other markets

All told, there’s more than $1.2 trillion in tappable equity in the Northeast and industrial Midwest. New York ($400.6 billion), Washington, D.C. ($171.3 billion) and Chicago ($161.3 billion) boast more total tappable equity than Boston.  But the average homeowner equity in “Beantown” — $189,000 — is the second highest on the East Coast.

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With $139.6 billion in total tappable equity, Boston is ranked 9th in the nation, ahead of Dallas, Miami, Denver and Atlanta (see story, “What Americans Should Know Before Cashing out $6 Trillion in Home Equity”).

Home values in the metro Boston area hit a low for the downturn of $305,700 in February, 2012. Since then, Zillow estimates the median home value in and around the metro Boston area has climbed by 48%, to $451,500. That’s an average gain of $145,800 per home, boosting tappable equity to $189,000, according to a separate analysis by mortgage data aggregator Black Knight.

The metro Boston area, which encompasses 3,486 square miles and includes Cambridge and Newton, is home to 4.8 million people. While home prices in much of the metro Boston area remain affordable, they’re getting out of reach for the average family in many enclaves.

The 10 priciest housing markets in the metro Boston area

1. Weston ($1,450,300 median home value)
2. Wellesley ($1,272,500)
3. New Castle ($1,215,300)
4. Dover ($1,092,000)
5. Lincoln ($1,075,700)
6. Newton ($1,067,000)
7. Winchester ($1,020,800)
8. Belmont ($988,000)
9. Lexington ($972,700)
10. Concord ($924,200)

Estimated median home values as of Sept. 30, 2018. Source: Zillow Home Value Index.

During the 2007-2009 recession, unemployment in the Boston area peaked at 8.1% in December 2009. Home values rebounded in the summer of 2012, undeterred by temporary increases in the unemployment rate, and by the spring of 2016 were breaking records set in 2005.

Tapping equity responsibly

Just because unemployment is falling and home prices are rising doesn’t mean homeowners can forget about ups and downs in the economy. Pulling too much cash out of a home can put homeowners at greater risk of foreclosure in a downturn.

But homeowners who keep at least a 20% stake in their homes when refinancing have enough of an “equity cushion” that lenders typically won’t require them to obtain private mortgage insurance.

Undertaken responsibly, a cash-out refinancing can provide homeowners with an affordable source of funding for home improvement projects or other big-ticket expenses like college or unexpected medical bills. Many homeowners are also tapping equity in their home to get rid of high-interest credit card or student loan debt.

Last year, U.S. homeowners accessed $92.1 billion in home equity through cash-out mortgage refinancing ($69.7 billion) or refinancing to pay down a second mortgage or home equity line of credit ($22.4 billion). That’s more than double the $42.5 billion in equity tapped through 2012 mortgage refinancings.

How to compare mortgage rates

For homeowners who are thinking about cashing out some of their equity by refinancing, it pays to compare mortgage rates.

Until recently, it’s been quite a chore to do that online. Today, there are three main avenues for exploring mortgage rates online:

• Single-lender websites
• Traditional rate comparison sites
• Modern mortgage marketplace

Some single-lender websites that facilitate “quickie mortgages” have reduced the hassle of applying for a loan. But they don’t provide information on rates available from other lenders, and may even discourage consumers from shopping for a mortgage.

The main goal of many traditional rate comparison sites is to convert consumers into “leads” and sell them to lenders. Since the rates they generate are often based on self-reported credit scores and little or no underwriting is performed, they can be misleading.

Credible.com is a modern mortgage marketplace that’s integrated with credit bureaus and lenders, so consumers can request actual rates from top mortgage lenders. Using Credible, consumers can:

• Compare actual rates in 3 minutes (not ranges or estimates)
• Shop and close “on platform,” like booking an airline ticket or buying essentials on Amazon
• Save time and avoid frustration with streamlined, digital origination process
• Consult with Credible’s licensed loan officers if needed

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While strong home equity growth presents an opportunity for many homeowners to meet financial goals like paying down costlier debt or improving their homes, they should make sure they’re not overpaying when they refinance their mortgages.

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