Los Angeles Homeowners Could Save $31,000 When Cashing out Equity

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• About 2.5 million metro Los Angeles area homeowners have $810.8 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 Los Angeles market have increased by 69% since 2011, bringing average “tappable equity” per home to $328,000
• Cashing out home equity without comparing actual mortgage interest rates could cost homeowners $31,000 or more in unnecessary interest charges

Rising home values mean 2.47 million homeowners in and around Los Angeles 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 69% from their February, 2012 bottom, these homeowners now have an average of $328,000 in “tappable equity.” That’s the amount of cash they can access while still retaining an ownership stake of at least 20 percent 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 $600,000 30-year mortgage refinance can save a Los Angeles area homeowner more than $31,000 over the life of the loan.

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How Los Angeles compares to other markets

All told, there’s $2.24 trillion in tappable equity in California’s top 12 markets. Because there are more of them, homeowners in the Los Angeles area have more total equity on tap ($810.8 billion) than pricier metros like San Francisco ($575.1 billion), and San Jose ($338.5 billion).

In fact, Los Angeles has the most tappable equity of any U.S. market, also outranking New York, Seattle, and Washington, D.C. (see story, “What Americans Should Know Before Cashing out $6 Trillion in Home Equity”).

After rebounding off of a false bottom in the summer of 2009, median home values hit a low for the downturn of $380,800 in February, 2012. Since then, Zillow estimates the median home value in and around the metro Los Angeles area has climbed by 69%, to $641,800. That’s an average gain of $261,000 per home, boosting tappable equity to $328,000, according to a separate analysis by mortgage data aggregator Black Knight.

The metro Los Angeles area, which encompasses 4,849 square miles and includes Long Beach and Anaheim, is home to 13.4 million people. With recent price increases, homes in the metro Los Angeles are becoming less affordable to many families, and prices in some neighborhoods are out of reach to most.

The 10 priciest housing markets in the metro Los Angeles area

1. Beverly Hills ($3,477,300 median home value)
2. Rolling Hills ($3,349,900)
3. Hidden Hills ($3,283,100)
4. Malibu ($2,974,800)
5. Newport Coast ($2,757,700)
6. Manhattan Beach ($2,456,200)
7. San Marino ($2,371,500)
8. Newport Beach ($2,159,300)
9. Laguna Beach ($2,137,500)
10. Palos Verdes Estates ($2,055,300)

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

During the 2007-2009 recession, unemployment in the Los Angeles area peaked at 12% in November 2010, and didn’t drop below 10 percent until September, 2012. By then, home values had already begun a steady, uninterrupted climb that lasted until the summer of 2018, when price appreciation cooled.

Tapping equity responsibly

It’s important to note that falling unemployment and rising home prices doesn’t mean homeowners don’t have to worry about ups and downs in the economy. Pulling too much cash out of a home can put homeowners at an elevated risk of foreclosure during a downturn.

But homeowners who keep at least a 20 percent 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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