Freddie Mac introduces a new product to help homeowners access home equity while keeping low mortgage rates

Freddie Mac is considering offering second-lien mortgages to homeowners who want to access their home equity without losing their current low-interest-rate mortgages. This proposal could be a cost-effective alternative to cash-out refinances at today’s higher rates, according to the Urban Institute. By allowing borrowers to retain their first mortgage with its low rate while tapping into their equity, homeowners could save money. For example, a borrower with a 3% mortgage rate on a $300,000 mortgage could take out a second mortgage for $100,000 while keeping their current monthly payment. This proposal is currently under review by the FHFA.

The locked-in effect, identified by the MBA, has left many homeowners with cheaper mortgages unwilling to sell or prepay their first mortgages in order to access their housing wealth. Banks have responded to this demand by offering various second-lien financing products, including home equity lines of credit (HELOCs) and second mortgages with flexible terms. Some of these products are bundled into securities and sold to investors. Freddie Mac’s proposed second mortgage would be available as a fixed-rate mortgage up to 20 years and would require the borrower to meet specific qualifications, such as having a combined loan-to-value ratio of 80% or lower.

Despite high homeownership rates, home equity continues to rise, with the average U.S. homeowner gaining approximately $24,000 in equity in 2023. Record high home prices have contributed to this increase, with home prices rising by 6.6% between the first quarter of 2023 and the first quarter of 2024. This growth has left most Americans in a strong financial position, with the average loan-to-value ratio remaining near record lows. Homeowners who were previously underwater due to price declines in 2022 now have notable equity reserves that can be tapped if needed.

However, rising home insurance rates in states like Florida are scaring away potential homebuyers. High insurance costs can make homeownership less affordable and deter buyers from entering the market. To learn more about drawing equity from your home or how to navigate the current housing market, consulting with a home loan expert can provide valuable insights. By staying informed about your options for accessing equity and navigating potential barriers to homeownership, you can make informed decisions about your financial future. Contacting Credible to compare multiple lenders or discuss available products can help you find the best solution for your needs.