Many Americans are experiencing a paper-rich situation with their homes.
Thanks to the continuous rise in housing prices, homeowners now have nearly $30 trillion in home equity, almost reaching the peak recorded in 2022, according to the St. Louis Federal Reserve .
This means that each homeowner has an average of $200,000 in equity that they can make use of. Most lenders allow borrowers to take out an amount that still leaves 20% equity in the home as a cushion.
Unlocking the Cash in Your Home
Previously, refinancing was a popular method for homeowners to access their accumulated home equity. However, with current mortgage rates at over 7%, this option is now less attractive.
Instead of opting for a cash-out refinance and risking high interest rates, many borrowers are now choosing to take out a second loan to access their home equity.
Another option is a home equity line of credit (HELOC), which allows borrowers to borrow money against a portion of their home’s equity. A HELOC works like a revolving line of credit, similar to a credit card, but with lower interest rates.
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Last year, there was a 50% increase in originations of home equity loans and HELOCs compared to two years earlier, as reported by the Mortgage Bankers Association (MBA).
“Given the nearly $30 trillion of accumulated equity in real estate, there is untapped potential for home equity lending for lenders and borrowers,” said Marina Walsh, MBA’s vice president of industry analysis.
Considering the Terms, Rates, and Risks
When it comes to borrowing against your home, the terms can vary greatly. A study by LendingTree analyzed over 580,000 home equity loan offers across the country.
The average home equity loan amount offered to homeowners is $104,102, with Iowa having the most favorable terms and an average interest rate of 9.88%. On the other hand, Maryland has the lowest average rate at 7.88%.
However, even at less than 10%, these rates are significantly lower than the average 20% interest charged on credit cards.
However, accessing your home equity is not always straightforward. Zillow’s senior economist, Nicole Bachaud, emphasizes that not everyone will qualify for an additional loan.
During the peak of the Covid pandemic, fewer banks offered HELOCs as they tightened their lending standards. Although access to HELOCs has improved, borrowers with higher credit scores and lower debt-to-income ratios still receive the most favorable terms.
“While a home equity loan can be beneficial for major expenses or debt consolidation, it also comes with potential drawbacks,” said Jacob Channel, LendingTree’s senior economist.
“Qualifying for a home equity loan can be more challenging than other types of debt, and defaulting on such a loan can have serious consequences,” Channel cautioned. In extreme cases, defaulting on a home equity loan can result in the loss of one’s property.
Bachaud suggests talking to multiple mortgage companies or loan officers and carefully considering all costs associated with different lenders before making a decision.
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