The current state of the housing market in the United States shows that home equity is nearing all-time highs. In the first quarter of 2024, total home equity for U.S. mortgage holders reached over $17 trillion, just slightly below the previous record set in the third quarter of 2023. The average equity per borrower also saw a significant increase of $28,000 from the previous year, totaling around $305,000. Chief Economist Selma Hepp noted that this surge in home equity is primarily due to the rise in home prices and the fact that many individuals refinanced their mortgages during the pandemic when interest rates were at historic lows.
While the surge in home equity may make homeowners feel financially secure on paper, tapping into this wealth can be challenging due to high borrowing costs. Financial advisors, including certified financial planner Kamila Elliott, have pointed out that options that may have been attractive in the past are now less favorable due to the increase in interest rates. For instance, a home equity line of credit (HELOC) is a common method of accessing home equity, but it comes with an average interest rate of 9.2%, which is significantly higher than typical mortgage rates.
Despite the high interest rates, some financial advisors still see merit in leveraging home equity through options like HELOCs. Borrowers can tap up to 85% of their home value with a HELOC, making it possible to pay off high-interest credit card debt or finance home repairs. However, advisors caution that borrowers must have a clear plan in place to pay off the HELOC quickly, ideally within a year or two, to avoid accumulating excessive debt.
Another avenue for homeowners to access their home equity is through a reverse mortgage, particularly for older Americans who have a significant portion of their wealth tied up in their homes. With a reverse mortgage, borrowers can receive funds either as a lump sum, a line of credit, or monthly installments, without having to make monthly payments on the loan. While a reverse mortgage can provide additional retirement income, it may reduce the inheritance left for heirs. Financial planner Lee Baker emphasizes that a reverse mortgage is best suited for individuals who have limited retirement savings and significant home equity.
In the past, homeowners have used their accrued home equity to move up the housing ladder. However, individuals with low fixed-rate mortgages may find themselves hesitating to sell their current homes due to the higher interest rates associated with new loans. While options like cash-out refinancing are available for those looking to access their home equity, financial experts advise caution and recommend thoroughly crunching the numbers before committing to such a strategy. Cash-out refinancing replaces an existing mortgage with a larger one, allowing borrowers to receive the difference in cash. However, this approach may lead to increased monthly payments and should be carefully evaluated based on individual circumstances.
While the rise in home equity presents opportunities for homeowners to leverage their assets, the current market conditions with high borrowing costs pose challenges for tapping into this wealth. Homeowners are advised to consult with financial advisors and carefully consider their options before deciding on the best approach to access their home equity.