Freddie Mac proposes product to help homeowners tap home equity without losing record low mortgage rates

Home equity levels have grown along with home prices

Freddie Mac's cash-out refinance proposal is more borrower-friendly than existing products. (iStock)

Freddie Mac wants to offer second-lien mortgages to help homeowners locked into lower-interest-rate mortgages access their home equity.

Freddie Mac's proposal would allow homeowners to access their home equity while keeping their low interest rate on their current loan. It could potentially be a cost-effective alternative to cash-out refinances at today's higher rates, according to the Urban Institute.

"Freddie Mac’s proposal is more borrower friendly because it would allow the borrower to retain their first mortgage, with its attractive rate, while tapping into their home equity," the Urban Institute stated in its briefing.

In one example given by the Urban Institute, a borrower with a 3% mortgage rate on a $300,000 mortgage would have a monthly payment of about $1,265. If this borrower, whose home is now worth $500,000 were to take out a cash out refinance to access $100,000 for their home improvements, the new $400,000 mortgage would carry an interest rate of about 7.25%, making the new monthly payment about $2,729.

However, with Freddie Mac's new proposed product, the borrower would keep their current $1,256 monthly payment, and take out a new, 20-year mortgage for the additional $100,000. This would add $965 per month at the assumed 7.25% interest rate, for a total monthly mortgage payment of $2,130.

Currently, the Federal Housing Finance Agency (FHFA) is taking comments on Freddie Mac's proposal as it considers whether to permit the mortgage giant's product to come to market.

If you're interested in tapping your home equity, you could consider a cash-out refinance. You can visit Credible to find your personalized interest rate without affecting your credit score.

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Locked-in effect leaves homeowners stranded

The Mortgage Bankers Association (MBA) said that the so-called locked-in effect has left homeowners with cheaper mortgages unwilling to sell and/or prepay their first mortgages and looking for a way to access the housing wealth built up in their properties.

Banks have stepped up their second-lien financing products to meet this growing demand. Familiar products like home equity lines of credit (HELOCs) have always been available. Additionally, several second mortgage products are being offered in the market today that allow the borrower to take the funds as needed rather than all upfront, similar to a HELOC. Others offer an array of terms (variable and fixed-rate products), according to the report by the Urban Institute. Some of these products are bundled into securities and sold to investors.

Freddie Mac's second mortgage would be available as an up-to-20-year fixed-rate mortgage, and the borrower would have to meet certain qualifications such as, Freddie Mac holds the first lien, the combined loan-to-value ratio is 80% or lower and the borrower is required to pay off the second lien when the borrower refinances, sells the house or otherwise pays off the first lien.

If you are interested in taking cash out of your home, you could consider a cash-out refinance. Visit Credible to compare multiple mortgage lenders at once and choose the one with the best rate for you.

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Home equity keeps gaining

The average U.S. homeowner gained approximately $24,000 in equity during 2023, with Rhode Island, New Jersey and Massachusetts registering the most significant gains, all at $50,000 or more, according to CoreLogic.

Record home prices are why home equity levels have risen nationwide, leaving most Americans in a good position. U.S. home prices rose 6.6% between the first quarter of 2023 and the first quarter of 2024, according to the Federal Housing Finance Agency (FHFA) House Price Index.

"Rising home prices continue to fuel growing home equity, which, at $298,000 per average borrower, remained near historic highs at the end of 2023," CoreLogic Chief Economist Selma Hepp said. "By extension, at 43%, the average loan-to-value ratio of U.S. borrowers has also remained in line with record lows, which suggests that the typical homeowner has notable home equity reserves that can be tapped if needed. More importantly, home price growth over the last year has helped lift the equity of homeowners who were underwater because of 2022 price declines – meaning that their mortgage amount was higher than the value of their properties."

If you want to learn more about drawing equity out of your home, contact Credible to speak to a home loan expert and get all of your questions answered.

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