The housing market has seen a significant increase in home equity, with homeowners collectively holding more than $32 trillion in equity as of the first quarter of 2024. This marks an all-time high according to the St. Louis Federal Reserve. Average borrowers have approximately $214,000 in equity that can be leveraged, with 60% of homeowners having at least $100,000 in equity, as reported by the Intercontinental Exchange’s Mortgage Monitor. Tappable equity represents the maximum amount that lenders will typically allow homeowners to take out while still maintaining a 20% cushion in the home.
Despite the record levels of housing wealth, borrowing against this equity has become increasingly expensive due to rising interest rates. The cost of borrowing against home equity is currently near its highest point in recent years, largely attributed to Federal Reserve rate hikes. Greg McBride, chief financial analyst at Bankrate.com, notes that high interest rates have made it more challenging to access home equity, changing the perception that it was once a cheap source of funds. The aftermath of the pandemic saw many homeowners refinancing their mortgages at rock-bottom interest rates, but the current rates around 6.3% have deterred many from pursuing cash-out refinances.
One alternative to cash-out refinancing is a home equity loan, which serves as a second mortgage allowing homeowners to tap into their equity while using their house as collateral. These loans provide a lump sum with a fixed interest rate, making them ideal for funding renovations or improving the home before selling. However, the current average interest rate for home equity loans stands at 8.52%, significantly higher than a traditional 30-year fixed-rate mortgage. While elevated rates have led to hesitation among homeowners, some may reconsider as rates begin to drop.
Another option for accessing home equity is through a home equity line of credit (HELOC), offering a revolving line of credit against a portion of the home’s equity. With better rates compared to credit cards, HELOCs provide flexibility in borrowing. While the average interest rate for HELOCs is close to 10%, it is still lower than typical credit card rates, which often exceed 20%. It is crucial to compare terms and rates from different lenders, weighing all costs before making a decision on borrowing against home equity.
While tapping into home equity can provide financial flexibility, it comes with inherent risks. Defaulting on a home equity loan can lead to serious consequences, including foreclosure and significant damage to credit scores. Before considering borrowing against home equity, it is essential to thoroughly assess the financial situation and ensure that repayment is feasible. Planning ahead and evaluating all options can help mitigate risks associated with leveraging home equity for cash.
The current landscape of the housing market offers homeowners substantial opportunities to access their home equity. However, careful consideration, thorough evaluation of options, and an understanding of the potential risks are essential before deciding to borrow against home equity. By maximizing equity responsibly, homeowners can leverage this valuable asset to achieve their financial goals while minimizing potential pitfalls.