Photo by Kindel Media: https://www.pexels.com/photo/a-couple-at-home-7765593/
Thanks to skyrocketing pandemic housing prices, Americans have an average of $200,000 in home equity and they’re tapping into it in increasing numbers, using their No. 1 source of wealth to borrow against the value of real estate with home equity lines of credit.
Home equity lines of credit or HELOCs have become more popular than cash-out refinancing for most homeowners, Bloomberg reported. As the U.S. Federal Reserve raised the benchmark rate 11 times since March 2022 in its fight against inflation, mortgage interest rates have risen from record lows.
The National average mortgage interest rate for purchasing a house is 7.49 percent as of this writing, according to Bankrate.com. The national average to refinance is 7.68 percent.
Thirty-year fixed mortgage rates hit their historic peak at 18.63 percent in October 1981.
Recent data from the St. Louis Federal Reserve shows that the average homeowner has about $200,000 in equity to tap into. So, if you have a lot of equity in your home, you may want to access it now before prices begin to fall, CBS reported.
This week’s Federal Reserve pause on interest rates means homeowners who are considering a home equity loan or HELOC could get a relatively lower interest rate before possible future rate hikes go into effect.
Amy Nixon, who identifies on Twitter as a macroeconomic analyst and freelance writer in the Dallas/Fort Worth area, tweeted her concern about the “insanity” of today’s housing market.
For example, a home in Prosper, Texas, that sold in 2021 for $685,000 cost the buyer’s monthly payments at the time of $3526, Nixon tweeted. The monthly payment today is $8402.
“THIS IS COMPLETE INSANITY STOP PRETENDING IT IS NOT” Nixon wrote.
Prosper is a town in the Dallas-Fort Worth-Arlington metropolitan area. In the 2010 census, its population was 9,423. As of 2023, the population was 37,746, according to U.S. Census data.
That growth rate is faster than 100 percent of similarly sized cities since 2000, according to BiggestUSCities.com.
“In Prosper my concern isn’t ARMs It’s massive HELOCS to fund lifestyles,” Dixon tweeted.
HELOCs can be used to pay for for large expenses such as renovations, debt consolidation, college tuition or for having liquidity in an emergency.
There is a difference between home equity loans and HELOC. With a home equity loan, you receive the money you are borrowing in a lump sum and usually have a fixed interest rate. With a home equity line of credit, you can borrow or draw money multiple times from an available maximum amount. Unlike a home equity loan, HELOCs usually have adjustable interest rates.
Adjustable-rate mortgages or ARMs are home loans with variable interest rates. The initial interest rate is fixed for a period. After that, the interest rate for the outstanding balance resets at yearly or monthly intervals, depending on the benchmark rate set by the Fed and lenders’ rates. ARMs generally have caps that limit how much the interest rate and payments can rise per year or over the lifetime of the loan.
An ARM is considered a good financial choice for homebuyers who are planning to keep the loan for a limited period and can afford any potential interest rate increases.
In recent years, lenders burned by the Great Recession kept a tight grip on HELOCs, which are considered relatively risky for banks because the credit line serves as a “second lien” that’s paid off after primary mortgage obligations, Bloomberg reported.
But with 30-year loan costs almost doubling since early 2022, the refinancing boom has receded and lenders are more open to HELOCs, according to Greg McBride, chief financial analyst at Bankrate.com.
“The phones in the mortgage refinance department aren’t ringing,” McBride said. “The way to get equity out of the home has swung to the Heloc.”
HELOCs are a favored way to pay for home renovations “but be aware of trends in residential real estate, especially in your local market,” Bankrate.com reported. “If you’re using a HELOC to borrow against your home’s equity, a significant decline in home values could cause your lender to reduce or freeze your line — as some homeowners learned during the Great Recession.”
A HELOC is a callable loan, Bankrate continued, meaning your lender can request that you repay some or all of it at any moment: “While that could theoretically happen if the residential real estate values plummet (as they did during the Great Recession), it’s more likely to occur only if you regularly miss payments or your credit score drops drastically.”
