Homeowners exploit home equity for cash

Washington, DC

As home values ​​remain strong across the country, Americans are tapping into their home equity to pay for renovations and debt.

Average mortgage rates are near 7%, and with inventory low in most housing markets across the country, home prices have held steady after surging during the pandemic.

That means homeowners now collectively own nearly $30 trillion in home equity, according to the St. Louis Federal Reserve.

As a result, originations of home equity lines of credit (known as HELOCs) and home equity loans increased 50% in 2022 compared to the previous two years, according to the Mortgage Bankers Association.

“Home renovations and remodeling drove increased demand for home equity products in 2022, with nearly two-thirds of borrowers citing this as a reason to apply for a home equity loan,” said Marina Walsh, MBA’s vice president of industry analysis.

Other reasons borrowers gave for taking out a HELOC or home equity loan included debt consolidation and emergency cash management.

Homeowner’s equity in their home can be a tremendous source of wealth. A HELOC is a revolving source of funds, like a credit card, that can be tapped as the homeowner needs. A home equity loan comes as a lump sum, often with a fixed interest rate, which can be useful for covering large one-time expenses such as renovation.

Home equity loans and lines of credit are secured against the homeowner’s home equity value, which is the difference between the value of your home and the amount you owe on your mortgage. A homeowner’s equity will fluctuate over time as they make mortgage payments and real estate market dynamics affect the current value of the home.

Typically, lenders offer lower rates for these types of loans than most other types of personal loans.

“The shortage of housing inventory, coupled with rising home prices and low first mortgage rates, makes home renovations an attractive alternative for many homeowners looking to improve their spaces,” Walsh said. “In addition, a HELOC, or home equity loan, is one way to finance large home projects while gaining a tax advantage through the mortgage interest deduction.”

The MBA study of lending and servicing open-ended HELOCs and closed-ended home equity loans was conducted in the spring. The MBA collected data from 20 member companies — including large banks, community banks, and credit unions — representing $37.8 billion in assets for 2022; $211.1 billion maximum credit extended to borrowers as of December 31, 2022; And $81.1 billion of outstanding loans as of December 31, 2022.

While U.S. mortgage originations continue to decline steadily, as a result of rising mortgage rates, lenders expect HELOC debt to increase 8.2% this year and 9.9% in 2024, year over year. Lenders expect home equity loan debt to increase 11.4% in 2023, but decline 5.6% in 2024, according to the report.

Nationally, mortgage balances remain near record levels as some people turn to home equity loans, rather than HELOCs, according to a quarterly report from TransUnion.

Total mortgage balances fell to $11.7 trillion in the second quarter, down slightly from the record high recorded in the previous quarter. This is the first quarterly decline in total mortgage balances since 2015, but balances are still 4.3% higher year over year, according to TransUnion.

Meanwhile, HELOC assets fell 14% year over year to 252,000 by the second quarter, but home equity loan assets rose 18%, rising from 203,000 to 240,000 over the same period.

“Home equity products remain viable options for consumers looking to leverage their equity to pay off higher-interest debt, with consumer interest in home equity loans in particular rising this year,” said Joe Millman, senior vice president of Mortgage. A TransUnion business leader on the findings of the latest Credit Industry Insights report.

“Mortgage rates higher than those in recent history continue to turn off potential borrowers, leading to a historic decline in mortgage origination,” he said.

Demand for refinancing has dried up. More than 90% of homeowners have a fixed mortgage rate of less than 6%, according to a recent analysis by Redfin, killing the incentive to refinance at a more expensive rate. The average interest on a 30-year fixed-rate mortgage was 6.96% last week, according to Freddie Mac.

But the vast majority of those who refinanced in the second quarter, 81%, chose to cash out, suggesting consumers are still interested in tapping into the equity in their homes, Millman said.

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