In the first quarter of 2024, homeowners are sitting on over $32 trillion in home equity, marking an all-time high, according to the St. Louis Federal Reserve. This surge is largely attributed to the unprecedented rise in housing prices across the country. The average borrower has access to approximately $214,000 in equity that can be tapped, with 60% of homeowners holding at least $100,000 in equity.
Despite the substantial amount of housing wealth that homeowners possess, the cost of borrowing against this equity is now at its peak. This is primarily due to the recent series of rate hikes by the Federal Reserve. Greg McBride, chief financial analyst at Bankrate.com, emphasized that high interest rates have made access to home equity more challenging than in previous years. Many individuals used to view home equity as a cheap source of funds, but with the current interest rates, that perception has shifted.
After the pandemic, numerous homeowners refinanced their mortgages when interest rates hit record lows, allowing them to pocket the savings as lump sums. However, with current mortgage rates hovering around 6.3%, fewer homeowners are opting for cash-out refinances. Despite this trend, there is a surge in mortgage refinance demand by over 100% compared to the previous year, as more homeowners are considering refinancing with lower rates.
Homeowners have the option of taking out a home equity loan or a home equity line of credit (HELOC) to tap into their home equity. A home equity loan, considered a second mortgage, provides borrowers with a lump sum at a fixed rate, making it ideal for financing renovations or repairs. On the other hand, a HELOC allows homeowners to borrow against a portion of their equity as needed, with better rates than credit cards.
While tapping into home equity can provide financial flexibility, it is essential to consider the risks associated with borrowing against your home. Defaulting on a home equity loan can lead to serious consequences, including foreclosure and damaged credit. Therefore, it is crucial to assess your ability to repay any borrowed funds and plan ahead to avoid financial pitfalls.
The surge in housing prices has led to a significant increase in home equity for homeowners, presenting opportunities for financial leverage. However, the high borrowing costs and risks associated with tapping into home equity require careful consideration and planning. By weighing the various options available and understanding the potential consequences, homeowners can make informed decisions that align with their financial goals and stability.