Americans have nearly $30 trillion in home equity: how to tap into it
Many Americans are home rich, at least on paper.
Thanks to skyrocketing real estate prices, homeowners currently have nearly $30 trillion in home equity St. Louis Federal Reserve – just below the 2022 peak.
That’s about $200,000 cash per homeowner that can be tapped into equity. This is the amount most lenders will allow you to withdraw while still leaving 20% equity in the home as a cushion.
Here’s how to tap into your home for cash
Until last year, withdrawing cash through refinancing was a popular way to access the equity you’ve accumulated in your home. With If mortgage rates are currently above 7%, that suddenly becomes a lot less attractive.
Even with high home interest rates, borrowers are more likely to take out a second loan to withdraw cash than to lose their low interest rate through a cash-out refinance.
Otherwise, you can use a home equity line of credit, also called a HELOC, to borrow money against a portion of your home’s equity. Instead of taking out a home loan with a fixed amount, a HELOC is a revolving line of credit, albeit with more favorable terms than a credit card, that you can use when you want or just have on hand.
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According to the Mortgage Bankers Association (MBA), new home loan originations and HELOCs increased 50% last year compared to two years prior.
“With nearly $30 trillion in accumulated real estate equity, there is untapped home equity potential for lenders and borrowers,” said Marina Walsh, MBA’s vice president of industry analysis.
Consider the conditions, rates and risks
When it comes to taking out loans for your home, the terms and conditions can vary widely, according to a LendingTree Report which analyzed more than 580,000 home loan offers across the country.
According to LendingTree, the average home loan amount offered to homeowners is $104,102. Homes in Iowa had the most favorable terms, with an average interest rate of 9.88% – two percentage points higher than Maryland’s average interest rate of 7.88%, the lowest in the country.
Still, at less than 10%, the interest rates are significantly lower than the cost of borrowing with credit cards, which charge around 20% on average.
However, “it’s not that easy to withdraw money from home,” said Nicole Bachaud, senior economist at Zillow. “Not everyone will qualify for additional credit.”
During the height of the Covid pandemic, as lenders tightened their standards to reduce their risk, fewer banks offered this option. Access to HELOCs has improved, although the most favorable terms still go to borrowers with higher credit scores and lower debt-to-income ratios.
“While a home equity loan can be a good way to finance large expenses like major renovations or consolidate high-interest debt, taking out such a loan is not without drawbacks,” added Jacob Channel, senior economist at LendingTree.
“Not only can a home loan be more difficult to qualify for than other types of debt, but defaulting on a home loan can have serious negative consequences,” Channel said. In some extreme cases, defaulting on a home loan can cause you to lose your home, he noted.
Even now, “borrowers should not rush into a home equity loan until they fully understand all the risks involved,” Channel warned.
Keep in mind that different lenders also offer different terms and interest rates, Bachaud added. She recommended speaking to several mortgage lenders or loan officers and weighing all the costs before deciding what makes the most sense.
https://www.cnbc.com/2023/09/07/americans-have-almost-30-trillion-in-home-equity-how-to-tap-it.html Americans have nearly $30 trillion in home equity: how to tap into it