As housing prices continue to rise, homeowners in the United States now have access to over $32 trillion in home equity as of the first quarter of 2024, according to the St. Louis Federal Reserve. This figure represents an all-time high in housing wealth, providing a potential financial resource for many homeowners. Jacob Channel, a senior economic analyst at LendingTree, noted, “It’s one of the very few things we can say about today’s housing market that is, more or less, positive.” This significant increase in home equity opens up opportunities for homeowners to tap into this wealth for various financial needs.
The average homeowner holds approximately $214,000 in home equity that can be accessed, with 60% of homeowners having at least $100,000 in equity, according to the Intercontinental Exchange’s Mortgage Monitor. Tappable equity refers to the amount of equity that most lenders will allow homeowners to borrow while still maintaining a 20% equity cushion in their homes. This equity can be utilized for various purposes, such as home renovations, debt consolidation, or investment opportunities.
Tapping into home equity can provide homeowners with a source of funds, but the cost of borrowing against this equity has increased in recent years due to rising interest rates. Greg McBride, chief financial analyst at Bankrate.com, highlighted that borrowing against home equity is currently more expensive compared to previous years, as a result of several rate hikes by the Federal Reserve. McBride cautioned, “There’s a long-held sense that it’s a cheap source of funds, but that paradigm has changed.” Homeowners need to carefully consider the financial implications of borrowing against their home equity.
Amidst the ongoing pandemic, many homeowners took advantage of historically low interest rates to refinance their mortgages and access cash through a lump sum payment. However, with mortgage rates currently hovering around 6.3%, fewer homeowners are opting for cash-out refinancing. McBride remarked, “As rates come down, you might see more opportunities for a cash-out refi, but nobody is going to confuse it with 2021,” referencing the period of ultra-low rates following the Federal Reserve’s rate cuts.
Alternatively, homeowners can consider a home equity loan as a means of accessing their home equity. This type of second mortgage allows borrowers to receive a lump sum of cash with a fixed interest rate, using their home as collateral. Holden Lewis, a home and mortgage expert at NerdWallet, suggested that a home equity loan could be beneficial for homeowners looking to fund renovations or repairs to their property before selling it. However, the current average interest rate for home equity loans stands at 8.52%, higher than typical mortgage rates.
Another option for homeowners is a home equity line of credit (HELOC), which functions as a revolving line of credit against a portion of the home’s equity. HELOCs offer flexibility in borrowing funds as needed, with interest rates lower than credit cards but higher than traditional mortgages. While the average HELOC interest rate is close to 10%, it still presents a more affordable borrowing option compared to credit cards that often charge over 20% in interest.
When considering tapping into home equity, it is essential for homeowners to evaluate the terms, rates, and risks associated with different borrowing options. LendingTree’s Channel advised homeowners to consult multiple mortgage companies or loan officers to compare costs and determine the most suitable course of action. Beyond the financial aspects, homeowners should also consider the potential risks involved in borrowing against their home equity. Defaulting on a home equity loan can lead to foreclosure and damage to one’s credit score, making it essential to plan and ensure repayment capability before accessing home equity.
As homeowners navigate the decision to tap into their home equity, it is crucial to approach the process with caution and thorough planning. McBride emphasized the importance of being proactive and strategic in leveraging home equity, especially in a market environment with fluctuating interest rates. By carefully weighing the costs, risks, and benefits of borrowing against home equity, homeowners can make informed decisions that align with their financial goals and circumstances.
In conclusion, the substantial increase in home equity presents an opportunity for homeowners to leverage their housing wealth for various financial needs. However, it is essential to consider the implications of borrowing against home equity, particularly in a market environment with rising interest rates. By exploring different borrowing options, comparing terms and rates, and assessing the risks involved, homeowners can make informed decisions that align with their financial objectives. Ultimately, tapping into home equity should be approached thoughtfully and responsibly to maximize its potential benefits while mitigating financial risks.