With home values remaining strong across the country, Americans are tapping into their home equity to pay for renovations and debts.
Average mortgage rates are close to 7% and with low inventory in most housing markets across the country, home prices have held firm after surging during the pandemic.
That means homeowners are now collectively sitting on 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 two years earlier, according to the Mortgage Bankers Association.
“Home renovations and remodeling drove demand for home equity products in 2022, with roughly two-thirds of borrowers citing it as a reason for applying for a home equity loan,” said Marina Walsh, MBA’s vice president of industry analysis.
Other reasons that borrowers gave for taking out a HELOC or home equity loan included debt consolidation and emergency cash management.
Hidden source of value
A homeowner’s equity in their home can be a tremendous source of wealth. A HELOC is a revolving source of funds, kind of like a credit card, that can be tapped as needed by the homeowner. A home equity loan comes as a lump sum, often with a fixed interest rate, that can be helpful for a one-time big expense like a renovation.
Home equity loans and lines of credit are secured against the value of a homeowner’s home equity, which is the difference between how much your home is worth and how much you owe on your mortgage. A homeowner’s equity will fluctuate over time as they make payments on their mortgage and real estate market dynamics impact the current value of the home.
Typically, lenders offer rates for these types of loans that are lower than for most other types of personal loans.
“The housing inventory shortage, combined with home-price appreciation and a low-rate first mortgage, make home renovations an attractive alternative for many homeowners who are looking to improve their spaces,” Walsh said. “Additionally, a HELOC or home equity loan is one way to finance big home projects while receiving a tax advantage through the deductibility of mortgage interest.”
MBA’s study for lending and servicing open-ended HELOCs and closed-end home equity loans was conducted in the spring. MBA collected data from 20 member companies — including large banks, community banks, and credit unions — representing $37.8 billion in originations for 2022; $211.1 billion in maximum credit extended to borrowers as of December 31, 2022; and $81.1 billion in outstanding borrowings as of December 31, 2022.
While mortgage originations in the U.S. have continued a steady decline, as a result of high mortgage rates, lenders expect HELOC debt to increase 8.2% this year and 9.9% in 2024, on an annual basis. Lenders expect home equity loan debt to increase 11.4% in 2023 but decrease 5.6% in 2024, according to the report.
Mortgage balances stay high because of home equity loans
Nationally, mortgage balances remain near record highs 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 previous quarter’s record high. This is the first quarterly decline in total mortgage balances since 2015, but balances are still 4.3% higher on a year-over-year basis, according to TransUnion,
Meanwhile, HELOC originations fell 14% year-over-year to 252,000 by the second quarter, but home equity loan originations were up 18%, rising from 203,000 to 240,000 over the same period.
“Home equity products continue to remain viable options for consumers looking to utilize their tappable equity to pay down higher interest debt, with consumer interest in home equity loans in particular, on the rise this year,” said Joe Mellman, senior vice president and mortgage business leader at TransUnion on findings from the most recent Credit Industry Insights Report.
“Mortgage rates higher than those in recent history continue to lend pause to potential borrowers, resulting in historically low mortgage originations,” he said.
The demand for refinances has all but dried up. More than 90% of homeowners have a fixed mortgage rate under 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, Mellman said, among those who refinanced in the second quarter, the vast majority – 81% – opted for cash-out, indicating that consumers remain interested in tapping into the equity in their homes.
