Thanks to the runup in housing prices, homeowners now have more than $32 trillion in home equity as of the first quarter of 2024, according to the St. Louis Federal Reserve — an all-time high. While the average borrower sits on roughly $214,000 in equity that can be tapped, 60% of homeowners have at least $100,000, the Intercontinental Exchange’s Mortgage Monitor also found. Tappable equity is the amount most lenders will allow you to take out while still leaving 20% in the home as a cushion. Rising home prices have “continued to build the fortunes of existing homeowners, pushing tappable equity to its highest level ever,” said Andy Walden, vice president of research and analysis at the Intercontinental Exchange. Currently, with mortgage rates higher than normal, fewer homeowners are jumping at the chance to do a cash-out refinance.
“As rates come down, you might see more opportunities for a cash-out refi, but nobody is going to confuse it with 2021,” Greg McBride, Chief Economist of Bank Rate said, referring to the period of “ultra-low” rates after the Fed slashed its benchmark to near zero. And yet, some homeowners are already more willing to refinance now that mortgage rates are down from recent highs — as of the latest reading, mortgage refinance demand is more than 100% higher than a year ago. Alternatively, a home equity loan is a type of second mortgage, which allows borrowers to pull cash while using the house as collateral. In this case, the loan comes as a lump sum with a fixed rate. “A home equity loan could be a good option for homeowners who want to raise money to pay for renovations, either to make the home more to their liking, or to fix it up before selling the home next year,” said Holden Lewis, home and mortgage expert at NerdWallet. However, the current average home equity loan interest rate is about two percent higher than current mortgage rates, according to Bankrate. In this case, as well, “elevated rates have contributed to homeowners’ reluctance to take out fixed-rate home equity loans,” Lewis said, “but some of that trepidation will melt as rates drop.”
Otherwise, a home equity line of credit, also known as a HELOC, lets you borrow money against a portion of your home’s equity. Instead of taking out a home loan at a fixed amount, a HELOC is a revolving line of credit — but with better rates than a credit card — that you can use when you want to or just have on hand. The average HELOC interest rate is even higher, according to Bankrate. While those rates are high compared with the typical mortgage or home loan, they are significantly lower than what it costs to borrow on credit cards, which charge more than 20%, on average. The cost of HELOCs will come down as the Federal Reserve lowers their Federal Funds Rate.
Source: CNBC
