Are more Americans tapping into home equity? Here's what to know
With today's high mortgage rates and a shortage of new homes for sale in many markets, a number of American homeowners may be looking to tap into the equity they've built in their homes instead of looking for something new. In fact, the Home Equity Lending Study, released this month by the Mortgage Bankers Association, reveals that home equity is surging. Originations of both home equity loans and home equity lines of credit (HELOCs) increased by 50% in 2022 compared to two years earlier, when the study was last conducted.
"Home renovations and remodeling drove demand for home equity products in 2022, with roughly two-thirds of borrowers citing it as a reason for applying for a home equity loan," Marina Walsh, CMB, the association's vice president of industry analysis said in the report's release. "Other borrower reasons were for debt consolidation (25 percent) and emergency cash management or other (10 percent)."
No matter what your long-term plans are for your home, tapping into home equity can have a lot of uses today — and even specific benefits to help reduce costs. Start by finding home equity rates you can qualify for here now.
Why use home equity today?
If you've been keeping up with the housing market fluctuations, you may already be familiar with the incentives home equity can offer homeowners compared to a new home purchase.
For one, mortgage rates are much higher today than they were just a few years ago. While pandemic-era rates dropped new mortgages to under 3% for some borrowers, today's top mortgage rates are between 6% and 7% or more. But there's also an ongoing shortage in homes for sale affecting several markets throughout the country — making it even more difficult to afford a home.
"The housing inventory shortage, combined with home-price appreciation and a low-rate first mortgage, make home renovations an attractive alternative for many homeowners who are looking to improve their spaces," Walsh also noted.
Borrowing from home equity could help you get lower interest rates since the loan is secured by your home. And if you decide to use your home equity for home renovations or repairs, you can enjoy the improvements now and preserve any increased price value when you are ready to make a change.
Learn more about home equity rates available for you today!
How to borrow from your home equity
If you're thinking about using home equity today, there are a few different options to consider:
Home equity loan
A home equity loan is sometimes called a second mortgage. When you qualify for this loan, you'll receive the amount you're eligible to borrow from the equity you've built in your home as a lump sum. Home equity loans have a fixed term and fixed interest rate — so you'll pay back the loan in monthly installments over time.
Like the other options below, the interest you accrue on your home equity loan may be tax deductible if you use the money for eligible home improvements outlined by the IRS.
HELOC
A HELOC, on the other hand, is an open line of credit that allows you to borrow only the amount you need from your approved credit limit — which is based on the equity you've built in your home. Throughout the multi-year draw period, you can borrow as much as you'd like. Then, you'll repay only what you actually borrowed over the longer repayment period.
HELOCs carry variable interest rates, so they could be a good option if you believe interest rates could drop in the future. Start comparing home equity loan and HELOC rates you can qualify for now.
Cash-out refinance
This option may be best for you if you already have a very high mortgage rate. Unlike the others, a cash-out refinance actually replaces your existing mortgage. You'll open a new mortgage loan at a new rate that's worth more than you actually owe currently. Then, you can take the difference as cash.
If you decide to refinance, there are some additional things to consider. For one, you'll take on added closing costs to complete the loan. You should also think about any differences in the loan term or other details that may differ from your existing mortgage and result in higher costs over time. Finally, if you have a lower interest rate already, you should consider whether refinancing is worth the added cost you'll pay through the lifetime of your loan.
The bottom line
With the challenges buyers are facing in today's housing market, you might want to consider tapping into equity you've built in your home while you wait out a potential move. Not only is this a great alternative, but it's also one that many Americans are taking advantage of. Using a home equity loan, HELOC or even cash-out refinance to make lasting home improvements can improve your experience today and boost your home's value when you sell in the future.
Learn more about your home equity options today and explore rates here!
