Home Equity Borrowing Extends Its Rise
Balances on home equity lines of credit increased by $23 billion in the three months ended Sept. 30, the largest quarterly gain since 2005, according to the Federal Reserve Bank of New York’s household debt report released Tuesday. CNBC reported that outstanding HELOC debt reached $481 billion, marking the 18th consecutive quarterly increase.
Despite the sustained expansion, balances remain below their financial-crisis-era high. A 2015 New York Fed report placed the peak at approximately $714 billion in the first quarter of 2009. The latest figures show a pronounced increase in borrowing against homes, but do not establish how households used the additional credit.
Low Mortgage Rates Give Owners a Reason to Stay
The increase comes against a sluggish housing market in which many homeowners would face significantly higher financing costs if they moved. A Realtor.com analysis of federal mortgage data found that 49.1% of outstanding mortgages carried interest rates of 4% or less in the second quarter. By comparison, Mortgage News Daily put the average rate for a typical 30-year fixed mortgage at 7.3% on Tuesday.
That gap contributes to the mortgage rate lock-in effect: owners have an incentive to keep their existing loans rather than purchase another property with more expensive financing. Douglas Boneparth, a certified financial planner and founder and president of New York-based Bone Fide Wealth, told CNBC that HELOCs allow owners to access equity while retaining the low rate on their primary mortgage.
Property prices also remain well above pre-pandemic levels. The National Association of Realtors reported a median existing-home price of $417,500 in September. That was only 1.3% higher than a year earlier, but nearly 54% above September 2019, underscoring the substantial increase in housing values over that period.
A Large Equity Base Supports Access to Credit
Mortgage holders collectively had $17.5 trillion in home equity in the third quarter, according to a new report from financial markets technology and data company Intercontinental Exchange. ICE estimated average tappable equity at $204,000 per borrower. Its definition requires homeowners to retain equity equal to at least 20% of their property’s value after borrowing.
Andy Walden, ICE’s head of mortgage and housing market research, said 2.4 million mortgage holders now have at least $1 million in equity. Those holdings illustrate the pool of housing wealth available to some borrowers, although equity itself is not cash unless accessed through borrowing or a sale.
CNBC described the annual increase in average tappable equity as both 1.2% and $16,600. Those figures do not reconcile mathematically with the reported $204,000 average, leaving the size of that year-over-year change unclear in the supplied account.
Flexible Drawdowns Carry Variable-Rate Exposure
Unlike a home equity loan or cash-out refinance, which provides funds upfront, a HELOC allows a borrower to withdraw money over time as needed. It may carry fewer initial costs than a home equity loan, but generally has a variable interest rate. Bankrate’s average rate for a $30,000 HELOC was 7.49% as of Nov. 4.
HELOC rates typically fluctuate with a benchmark such as the prime rate. The Federal Reserve does not directly set prime, but changes in its federal funds rate influence it. This leaves borrowers exposed to changing interest costs even when their original mortgage rate remains fixed. Boneparth, who also serves on CNBC’s Financial Advisor Council, cautioned that a budget dependent on rates staying at today’s level may not withstand an increase.
Repayment Terms Can Change the Household Burden
Many HELOCs have a draw period lasting five or 10 years, during which borrowers typically need to pay only interest on money withdrawn. A subsequent repayment period, potentially lasting 10 or 20 years, requires both principal and interest payments. Boneparth said payments could potentially double when that transition occurs, depending on the loan’s structure and whether the borrower previously paid only interest.
The purpose of the borrowing also affects the risk. Boneparth said financing improvements to the property can make sense, while using housing equity to repay credit cards replaces unsecured borrowing with debt backed by the home. Without a change in spending habits, he warned, that approach can relocate rather than resolve a household’s debt problem. The balance increase alone does not show how prepared borrowers are for future rate changes or principal repayments.
Source: CNBC