As of the first quarter of 2024, total home equity for U.S. mortgage holders reached over $17 trillion, just short of the all-time high set in the previous year. Data from CoreLogic indicates that the average equity per borrower has increased by $28,000 to approximately $305,000. This substantial rise in wealth represents a nearly 70% increase from pre-pandemic levels. The surge in home equity can largely be attributed to the escalating home prices in recent years. Furthermore, a significant number of homeowners took advantage of the lower interest rates during the pandemic to refinance their mortgages, thus accelerating the reduction of their debt.
Despite the substantial growth in home equity, financial advisors point out that accessing this wealth can be hindered by high borrowing costs in the current economic climate. The increased interest rates have made some borrowing options less appealing now compared to a few years ago. One common method of tapping into home equity is through a Home Equity Line of Credit (HELOC). HELOCs allow borrowers to borrow against their equity for a predetermined period, but the interest rates are typically higher compared to fixed-rate mortgages. While the average interest rate for a HELOC stands at 9.2%, rates on a 30-year fixed-rate mortgage are around 7%.
Financial advisors suggest several alternatives for homeowners looking to leverage their home equity. One option is to use a HELOC to pay off high-interest credit card debt, given the lower interest rates compared to credit cards. However, advisors caution against making minimum payments on HELOCs and stress the importance of paying off the balance quickly. Homeowners can also consider a reverse mortgage as a way to access their home equity, particularly for older individuals looking to supplement their retirement income. A Home Equity Conversion Mortgage (HECM) is the most common type of reverse mortgage available to homeowners aged 62 and older.
While tapping into home equity can provide financial flexibility, borrowers must carefully weigh the risks and benefits associated with each option. For instance, a cash-out refinance, where a new, larger mortgage replaces the existing one, can result in higher monthly payments and should be viewed as a last resort. Financial advisors emphasize the importance of thorough analysis and consideration of all factors before proceeding with any home equity-related decisions. Ultimately, homeowners need to have a clear and strategic plan in place to manage their debt responsibly while accessing their home equity.