- US homeowners are sitting on $29.6 trillion of home equity, according to the Federal Reserve.
- Higher mortgage rates have curbed cash-out refinancing, one way of tapping the equity.
Americans have record levels of equity in their homes after a decade of appreciation. As it turns out, they need it — and fast.
Homeowners are asking banks for credit lines in numbers not seen in years. With home-equity lines of credit, they cashed in on their homes to the tune of $14 billion last quarter, a third consecutive quarterly increase and the largest jump in more than a decade, according to the Federal Reserve Bank of New York.
HELOCs are used for multiple reasons, including paying for the home renovations that became more important as people nested earlier in the pandemic. But the faster inflation of the past year has Americans looking to their $29.6 trillion in home equity to cover basic living expenses, too, especially when they're taking on additional and more-expensive credit-card debt.
"Whether it's shopping for a new car or buying eggs in the grocery store, consumers continue to be impacted in ways big and small by both high inflation" and the Federal Reserve's interest-rate hikes, Michele Raneri, the vice president of US research and consulting at TransUnion, said in a housing report in February. She added that the credit-reporting agency expected even more consumers to turn to HELOCs for financial help, with debt consolidation in mind.
HELOCs are similar to second-lien mortgages, though they differ in that homeowners draw from the credit line when they need to, instead of receiving a single lump-sum payment. They are attractive to homeowners for the luxury of having cash on demand, though the credit can be unpredictable because of varying interest rates and fees. Payments work like those on credit cards, with interest paid monthly on the the amount of credit used.
HELOCs are in; refinancings are out
HELOCs partly owe their rising popularity to the soaring long-term-mortgage rates, which have slowed the pace of refinancings to 70% of 2022 levels. When mortgage rates were falling, homeowners didn't need HELOCs because lenders were eager to originate cheap "cash-out refinances," where they'd write a new and larger loan at a similar or lower interest rate and let the customer walk away with sums in the thousands of dollars.
HELOC rates have climbed, too, but homeowners have flexibility with how much financing they buy versus taking out a 30-year loan on the house. HELOC rates averaged 7.8% in mid February.
It's not just refinancings that have fallen. High mortgage rates have created a lock-in effect in the US housing market as the majority of US home loans were created with 30-year rates below 4%. Faced with today's rates above 6%, homeowners don't want a new mortgage or to give up their cheaper one, one phenomenon causing the prolonged slump in home sales.
The downturn in lending has rattled the nation's mortgage industry, leaving many to cut jobs and look for ways to keep the lights on.
A recognition that consumers are struggling — and of the mountain of untapped equity — has lit a fire under lenders to get the word out on HELOCs and similar products. The opportunity is huge: About $1.6 trillion of home equity is available to borrowers whose loans have been purchased by the government-sponsored enterprises Fannie Mae and Freddie Mac, according to BofA Global Research.
Indeed, major lenders like Guaranteed Rate, LoanDepot, and Rocket Mortgage have ventured into the space or expanded offerings over the past two years.
Andrew Becker, a senior vice president in home equity lending at Guaranteed Rate, told Insider that the company foresaw robust demand for HELOCs in 2023. People will likely be using their home equity to pay down credit cards, auto loans, and other debt, in addition to making renovations, he said.
"We anticipate that we're going to continue growing," he said. "If folks are already in a home, they're likely going to stay in their homes longer and will want to do remodels and home improvements."
Investors tap HELOCs, too
For some homeowners, there is so much equity that they can think even bigger than a new kitchen or bathroom. Some might think of financial independence.
Tate Cline, a 38-year-old finance manager from Delaware, Ohio, took out a $150,000 HELOC in April to purchase a three-cabin property and turn it into a set of short-term rentals, Insider's Jordan Pandy reported. His home value increased 40% earlier in the pandemic, making the six-figure credit line possible, Cline told Insider.
"I paid my down payment to purchase the cabin property and also all the money for the rehab — which is going to be probably $100,000 to $110,000 total with furniture," Cline previously told Insider. "I'm using HELOC for the whole thing."
Since October, when he bought the property and started renovations, the interest rate on his loan has increased from 6.5% to 7.5%. Cline's monthly payment rose by $170.
Despite the additional costs, he's convinced the project and his loan will be worth it.
"The rate increase is not going to move the needle a ton for me," he said.
Have you taken out a HELOC? We'd like to hear your story of getting the credit line and how you've used it. Email alloyd@insider.com.