Americans are taking advantage of the strong housing market and high home values to access their home equity for various purposes. According to the St. Louis Federal Reserve, homeowners collectively have nearly $30 trillion in home equity. As a result, there has been a significant increase in the origination of Home Equity Lines of Credit (HELOCs) and home equity loans, which have risen by 50% in 2022 compared to two years ago, as reported by the Mortgage Bankers Association. The demand for these products is primarily driven by home renovations and remodeling, with debt consolidation and emergency cash management also being cited as reasons for borrowing.

Home equity loans and HELOCs are secured against the value of a homeowner’s equity, which is the difference between the home’s worth and the mortgage debt. These loans offer lower interest rates compared to other personal loans, making them an attractive option for homeowners looking to finance big projects or expenses. Furthermore, the deductibility of mortgage interest provides a tax advantage for borrowers. Lenders anticipate an increase in HELOC debt by 8.2% this year and 9.9% in 2024, while home equity loan debt is expected to rise by 11.4% in 2023 but decline by 5.6% in 2024, according to the Mortgage Bankers Association.

While mortgage originations in the U.S. have been declining due to high mortgage rates, home equity loans have helped keep mortgage balances near record highs. According to TransUnion, total mortgage balances fell slightly to $11.7 trillion in the second quarter, but they are still 4.3% higher compared to the previous year. Meanwhile, HELOC originations decreased by 14% year-over-year, while home equity loan originations increased by 18%. Joe Mellman, senior vice president at TransUnion, noted that consumers are using home equity products to pay down higher interest debt and that interest in home equity loans is on the rise.

Overall, the strong housing market and high home values are providing homeowners with a valuable source of wealth through their home equity. With low mortgage rates and the ability to deduct mortgage interest, homeowners are increasingly tapping into their equity for renovations, debt consolidation, and emergency cash management. However, while home equity loans are on the rise, mortgage originations have declined due to high rates, leading borrowers to opt for cash-out refinances to access their equity.

Americans Tapping into Home Equity for Renovations and Debts

With home values remaining strong across the country, many Americans are taking advantage of their home equity to finance renovations and pay off debts. According to the St. Louis Federal Reserve, homeowners collectively have nearly $30 trillion in home equity. As a result, originations of Home Equity Lines of Credit (HELOCs) and home equity loans have increased by 50% in 2022 compared to two years ago, as reported by the Mortgage Bankers Association (MBA).

Driving Factors: Home Renovations and Remodeling

The main driver behind the demand for home equity products is home renovations and remodeling. Approximately two-thirds of borrowers cited this as their reason for applying for a home equity loan, according to Marina Walsh, the MBA’s vice president of industry analysis. The current housing inventory shortage, combined with home-price appreciation and low-rate first mortgages, makes home renovations an attractive option for homeowners looking to improve their living spaces. Additionally, HELOCs and home equity loans offer a tax advantage through the deductibility of mortgage interest.

Understanding Home Equity Loans and HELOCs

Home equity loans and HELOCs are both secured against the value of a homeowner’s equity, which is the difference between the home’s worth and the outstanding mortgage balance. A HELOC is a revolving source of funds, similar to a credit card, that can be tapped into as needed. On the other hand, a home equity loan provides a lump sum with a fixed interest rate, making it suitable for one-time big expenses like renovations. Lenders typically offer lower rates for these types of loans compared to other personal loans.

Mortgage Balances and Home Equity Loans

According to a report from TransUnion, mortgage balances in the U.S. remain near record highs. However, some people are turning to home equity loans instead of HELOCs. Total mortgage balances fell slightly to $11.7 trillion in the second quarter, marking the first quarterly decline since 2015. Despite this, mortgage balances are still 4.3% higher year-over-year. HELOC originations have declined by 14% year-over-year, while home equity loan originations have increased by 18%.

Conclusion

With the current state of the housing market and low mortgage rates, many homeowners are leveraging their home equity to fund renovations and manage debts. The strong demand for home equity loans and HELOCs is driven by the desire to improve living spaces and take advantage of tax benefits. While mortgage balances remain high, some homeowners are turning to home equity loans as an alternative to HELOCs. Overall, lenders expect HELOC debt to increase in the coming years, while home equity loan debt is expected to fluctuate.