Interest rates are rapidly changing while homeowners are raking in record amounts of equity. For some, all signs point to HELOCs.
Mortgage rates are hovering around 6%, reaching a high not seen in years, while home equity levels continue their upward trajectory. For some mortgage market spectators, this could mean only one thing: Hello, home equity loans!
Right? Well, maybe. Let’s just say some are more enthusiastic than others.
So, what are the odds? Will the mortgage market see a sizable uptick in home equity lending in the year ahead?
Let’s break it down.
Mortgage rates have shot up so significantly in the last four months that homeowners are extremely unlikely to refinance. That means lenders can say goodbye the healthy revenue stream that kept profits flowing last year.
These new, higher rates are also going to scare away some prospective buyers who recognize that a move would cost them substantially more than it would have a year ago. So, adios purchase volume.
But at the same time, many homeowners are sitting atop their largest asset – a heaping pile of equity that continues to grow despite other declining market factors. It’s an unusual combo, one that hasn’t happened in recent history.
Recent data shows that the first quarter of 2022 saw the greatest gain in tappable equity on record, with levels jumping $1.2 trillion to reach a collective $11 trillion in tappable equity.
Breaking it down, that means U.S. homeowners are sitting on an average of $207,000 in equity that they could access while still leaving a healthy 20% buffer in place.
That’s a lot of money that could go a long way for a lot of people.
The situation has some, like the MReport, predicting the emergence of “a new type of borrower,” one who will “want to pull cash out of their home without refinancing.”
“More and more homeowners will be looking for home equity loans in order to tap into the unprecedented levels of cash in their homes without increasing the interest rate on their current mortgage,” the MReport recently said.
For those homeowners, home equity loans and, especially, HELOCs are here to help them access that wealth and leverage it to meet their needs or wants – whether the goal is to consolidate debt to avoid eye-watering interest rate fees in a time of inflation, or to finance a renovation to keep your home and avoid a costly new mortgage or reduce your insurance costs by say adding a new roof or hurricane-proof glass.
The whole situation has some people borderline excited.
In an opinion piece for HousingWire, Knox Financial’s David Friedman said he expected HELOCs to be the “equity-access vehicle of choice” for homeowners.
“Much like 2021 was a record year for refinancing, 2022 could be a record year for HELOCs,” Friedman wrote.
But don’t get too excited just yet.
Mortgage loans have gotten more expensive with today’s interest rates, and home equity loans are a part of that mix. HELOCs often come with a variable rate that tracks an index affected by the Fed’s recent 75-basis-point hike.
This means that tapping that equity will be more expensive than it was in the past. But will that be enough to deter borrowers, or will the macro-economic forces at play tip the scales in favor of home equity loans?
Time will tell, and we’ll be watching.