With home values remaining strong across the country, Americans are tapping into their home equity to pay for renovations and debts. 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. 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.” “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.

Source: CNN