The housing market has seen a significant increase in home equity, reaching over $32 trillion in the first quarter of 2024. This amount of equity is considered an all-time high, providing homeowners with a substantial financial cushion. According to senior economic analyst Jacob Channel from LendingTree, this surge in home equity is a positive aspect in a currently tumultuous housing market. Additionally, data from the Intercontinental Exchange’s Mortgage Monitor reveals that 60% of homeowners have at least $100,000 in equity available to them, with an average of $214,000 in equity per borrower that can be accessed.
Rising home prices have been a driving force behind the increase in tappable equity. This rise in housing wealth has allowed existing homeowners to accumulate more equity, leading to the highest level of tappable equity ever recorded. Andy Walden, the vice president of research and analysis at the Intercontinental Exchange, attributes this surge in tappable equity to the continuous uptrend in home prices.
Despite the abundance of tappable equity, borrowing against home equity is becoming increasingly costly. Chief financial analyst Greg McBride from Bankrate.com highlights that the cost of borrowing against one’s home is currently at a high due to multiple rate hikes by the Federal Reserve. High-interest rates make accessing home equity more challenging, altering the perception that home equity is a cheap source of funds. McBride emphasizes that the paradigm has shifted, making borrowing against home equity less favorable under current interest rate conditions.
In response to the pandemic, many homeowners took advantage of historically low-interest rates to refinance their mortgages and utilize the surplus cash. However, with current mortgage rates hovering around 6.3%, the appeal of cash-out refinancing has diminished. McBride suggests that as interest rates decrease, opportunities for cash-out refinancing may improve. Despite this, some homeowners are already considering refinancing due to the recent decline in mortgage rates.
When considering borrowing against home equity, homeowners have the option of a home equity loan or a home equity line of credit (HELOC). A home equity loan provides a lump sum with a fixed interest rate, making it ideal for homeowners looking to fund renovations or improvements. On the other hand, a HELOC offers a revolving line of credit that allows homeowners to borrow against a portion of their home’s equity when needed, albeit at a slightly higher interest rate.
While the interest rates for both home equity loans and HELOCs may be higher than traditional mortgages, they are lower than credit card rates. However, it is essential for homeowners to carefully evaluate all costs and terms before deciding on a borrowing option. Channel advises homeowners to consult multiple lenders and thoroughly assess the risks associated with borrowing against home equity. Defaulting on a home equity loan can lead to severe consequences, including foreclosure and damage to one’s credit rating. Planning ahead and ensuring the ability to repay borrowed funds is crucial in safeguarding against financial setbacks.
Overall, the state of home equity in 2024 presents both opportunities and challenges for homeowners. As housing prices continue to rise and interest rates fluctuate, it is essential for individuals to make informed decisions when considering borrowing against their home equity. Vigilance, thorough planning, and careful consideration of all available options are key to leveraging home equity effectively and responsibly.