In the first quarter of 2024, homeowners in the United States collectively held more than $32 trillion in home equity, marking an all-time high, as reported by the St. Louis Federal Reserve. This surge is primarily attributed to the rapid rise in housing prices, creating a positive aspect in an otherwise challenging housing market landscape. According to senior economic analyst Jacob Channel from LendingTree, the average borrower has access to around $214,000 in home equity, while 60% of homeowners possess at least $100,000. Tappable equity, which is the amount most lenders allow homeowners to borrow while maintaining a 20% equity cushion in their homes, has reached unprecedented levels due to escalating property values, stated Andy Walden, vice president of research and analysis at the Intercontinental Exchange.
Although homeowners are sitting on a record amount of housing wealth, borrowing against home equity comes with challenges. The cost of borrowing has increased significantly, with high interest rates posing a barrier for many borrowers. Greg McBride, chief financial analyst at Bankrate.com, highlighted that borrowing against home equity is currently more expensive due to a series of rate hikes by the Federal Reserve. This shift has made access to home equity more challenging, eroding the perception of it being a cheap source of funds. With interest rates hovering around 6.3%, the cost of borrowing has become a crucial factor for homeowners considering leveraging their home equity.
The Evolution of Cash-Out Refinancing
In the aftermath of the pandemic, many homeowners opted to refinance their mortgages to capitalize on historically low-interest rates. This strategy allowed them to extract equity as a lump sum when refinancing their homes. However, the landscape has changed with current mortgage rates around 6.3%, making cash-out refinancing less attractive compared to the “ultra-low” rates prevalent in 2021. McBride noted that while there may be future opportunities for cash-out refinancing as rates fluctuate, the current environment is markedly different from the past.
Apart from cash-out refinancing, homeowners have other borrowing options such as home equity loans and home equity lines of credit (HELOCs). A home equity loan functions as a second mortgage, allowing homeowners to receive a lump sum with a fixed interest rate. While this option provides a way to fund renovations or improvements, the current average interest rate for home equity loans stands at 8.52%, higher than a typical 30-year fixed-rate mortgage. On the other hand, HELOCs offer a revolving line of credit against a portion of home equity with better rates than credit cards, despite the average interest rate nearing 10%. Borrowers have to weigh the pros and cons of each borrowing option and consider current interest rates before making a decision.
Despite the allure of tapping into home equity for financial needs, borrowers should be cautious about the risks associated with borrowing. Defaulting on a home equity loan can have severe consequences, including foreclosure and damage to creditworthiness. It is essential for homeowners to plan ahead, assess their financial situation, and ensure that they can repay any borrowed amount to avoid long-term repercussions. As Channel recommended, thorough consideration and careful planning are vital when exploring borrowing options against home equity to mitigate potential risks and financial challenges.
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