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Home equity is near all-time highs. But exploiting it may be difficult due to high interest rates, according to financial advisors.
Total home equity for U.S. mortgage holders rose to more than $17 trillion in the first quarter of 2024, just short of the record high set in the third quarter of 2023, according to new data from CoreLogic.
Average equity per borrower rose $28,000 — to about $305,000 in total — compared to the previous year, according to CoreLogic. This is up nearly 70% from $182,000 before the Covid-19 pandemic, said chief economist Selma Heap.
About 60% of homeowners have a mortgage. Their equity is equal to the value of the home minus the debts owed. The total home equity of homeowners in the United States, with or without a mortgage, is $34 trillion.
The jump in home equity is largely due to rising home prices, Hipp said.
Many people also refinanced their mortgage earlier in the pandemic when interest rates were “really low,” which may have allowed them to pay off their debt faster, she said.
“For people who owned their homes at least four or five years ago, on paper they feel good and happy,” said Lee Baker, founder, owner and president of Apex Financial Services in Atlanta.
However, accessing that wealth is complicated by high borrowing costs, said Baker, a certified financial planner and member of CNBC's advisory board, and other financial advisors.
“Some options that may have been attractive two years ago are no longer attractive now because interest rates have increased so dramatically,” CFP Kamila Elliott, co-founder of Collective Wealth Partners and an advisory board member, told CNBC.
However, there may be some cases where it makes sense, the advisors said. Here are a few options.
Home equity line of credit
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A home equity line of credit, or HELOC, is typically the most popular way to tap into housing wealth, Hipp said.
The HELOC program allows homeowners to borrow against the equity in their homes, generally for a specified period. Borrowers pay interest on the outstanding balance.
The average HELOC interest rate is 9.2%, according to Bankrate data as of June 6. Rates are variable, meaning they can change unlike fixed-rate debt. (Homeowners can also consider taking out a home equity loan, which typically carries fixed interest rates.)
For comparison, interest rates on a 30-year fixed-rate mortgage are about 7%, according to Freddie Mac.
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While HELOC interest rates are high compared to a typical mortgage, they are much lower than credit card interest rates, Elliott said. Credit card holders with an account balance earn an average interest rate of about 23%, according to Federal Reserve data.
Borrowers can generally tap up to 85% of their home's value minus outstanding debt, according to Bank of America.
Homeowners can take advantage of a HELOC to pay off high-interest credit card debt they owe, Elliott said. However, they should have a “very targeted plan” to pay off the HELOC as soon as possible, ideally within a year or two, she added.
For people who have owned their homes for at least four or five years, on paper they feel fat and happy.
Lee Baker
Certified financial planner
In other words, don't just make the minimum monthly debt payment — which can be tempting because those minimum payments are likely to be lower than those on a credit card, she says.
Likewise, homeowners who need to make repairs or improvements to the home can take advantage of a HELOC instead of using a credit card, Elliott explained. There may be an added benefit to doing so, she added: Those who itemize their taxes may be able to deduct their loan interest on their tax returns.
Reverse mortgage
A reverse mortgage is a way for older Americans to leverage the equity in their homes.
Like a HELOC, a reverse mortgage is a loan against the equity in your home. However, borrowers don't repay the loan every month: the balance grows over time as interest and fees accumulate.
A reverse mortgage is likely best for people who have a lot of their wealth tied up in their homes, advisors said.
“If you're late in starting retirement (savings), that's another potential source of retirement income,” Baker said.
A Home Equity Conversion Mortgage (HECM) is the most common type of reverse mortgage, according to the Consumer Financial Protection Bureau. It is available to homeowners age 62 or older.
A reverse mortgage is available as a lump sum, line of credit, or monthly installment. It's a non-recourse loan: If you take steps like paying property taxes and maintenance expenses, and using the home as your primary residence, you can stay in the home as long as you want.
Borrowers can generally tap up to 60% of their home equity.
The homeowners or their heirs will eventually have to repay the loan, usually by selling the home, according to the CFPB.
While a reverse mortgage generally leaves a smaller amount of inheritance to heirs, this should not necessarily be seen as a financial loss to them: In the absence of a reverse mortgage, those heirs would probably have been paying out of pocket to help support the borrower's retirement income anyway, as Elliot said. .
Sell your house
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Historically, the biggest advantage of obtaining home ownership was accumulating more money to put toward a future home, Heap said.
“This is the historical way people were able to move up the housing ladder,” she said.
But homeowners with a lower-rate mortgage may feel locked into their current homes because of the relatively high rates that may accompany a new home equity loan.
Relocation and downsizing remain an option, but “that calculation doesn't really work in their favor,” Baker said.
“Not only has the value of their home gone up, but so has everything else in the immediate area,” he added. “If you're trying to find something new, you won't be able to do much with it.”
Cash-out refinancing
A cash-out refinancing is another option, although it should be considered a last resort, Elliott said.
“I don't know anyone right now who recommends cash back,” she said.
A cash-out refinance replaces your existing mortgage with a new, larger loan. The borrower will receive the difference as a lump sum.
To give a simple example: Let's say a borrower has a home worth $500,000 and an outstanding mortgage of $300,000. They could refinance a $400,000 mortgage and get a difference of $100,000 in cash.
Of course, they would likely refinance at a higher interest rate, which means their monthly payments would likely be much higher than their current mortgage, Elliott said.
“Really crunch the numbers,” Baker said of the options available to homeowners. “Because you're weighing down the roof over your head. This can be a risky situation.”
