The total home equity for U.S. mortgage holders has been on the rise, reaching over $17 trillion in the first quarter of 2024. This increase comes close to the previous record set in the third quarter of 2023. On average, equity per borrower has seen a significant jump of $28,000 in the past year, totaling around $305,000 according to research from CoreLogic. Chief Economist Selma Hepp noted that this surge represents a nearly 70% increase from pre-pandemic levels. The rise in home equity is primarily attributed to the spike in home prices and an increase in refinancing activity during the early stages of the pandemic when interest rates were at historic lows.
While home equity is at an all-time high, financial advisors warn that tapping into this wealth may not be as straightforward due to the high interest rates prevailing in the market. This has made certain borrowing options that were attractive in the past less feasible now. Interest rates have seen a significant increase over the past few years, making it more expensive for homeowners to leverage their home equity. However, there are still some viable options available for those looking to access their housing wealth.
One common way to tap into home equity is through a Home Equity Line of Credit (HELOC). This allows homeowners to borrow against their home equity for a specified period. While HELOCs typically carry an interest rate of around 9.2%, they are still lower than credit card rates. Borrowers can use a HELOC to pay off high-interest debt such as credit cards by creating a strategic plan to pay off the borrowed amount within a short period.
Another alternative is a reverse mortgage, which is primarily meant for older Americans looking to utilize their home equity for additional income in retirement. Instead of making monthly payments, borrowers let the loan balance accumulate over time. This serves as a potential income source for those who may have limited retirement savings apart from their home equity. While reverse mortgages are not suitable for everyone, they can be a valuable tool for certain individuals.
For homeowners with fixed-rate mortgages, moving to a new home might not be a financially viable option due to higher interest rates on new loans. Downsizing or selling the current property can also be challenging as property values have risen. In such cases, exploring a cash-out refinance can provide access to additional funds, albeit as a last resort. However, homeowners must carefully evaluate the impact of refinancing on their monthly payments and overall financial situation before proceeding with this option.
While high interest rates may pose a challenge when tapping into home equity, there are still avenues available for homeowners to leverage their housing wealth effectively. By working closely with financial advisors and exploring various borrowing options, individuals can make informed decisions that align with their financial goals and priorities. It’s essential to weigh the pros and cons of each option carefully and consider the long-term implications before taking any steps to access home equity.