Home equity in the United States is currently near all-time highs, with total home equity for mortgage holders reaching over $17 trillion in the first quarter of 2024. The average equity per borrower has increased to about $305,000, up nearly 70% from before the Covid-19 pandemic. This increase is largely due to a surge in home prices and many homeowners taking advantage of low interest rates to refinance their mortgages, allowing them to pay down their debt faster.
While many homeowners may feel wealthy on paper due to their high home equity, accessing this wealth may be challenging due to high borrowing costs. Financial advisors caution against tapping home equity unless there is a specific need. Some options for tapping home equity include a home equity line of credit (HELOC) or a reverse mortgage. A HELOC allows homeowners to borrow against their home equity, with interest rates currently averaging around 9.2%. This can be a useful option for paying off high-interest credit card debt or making home repairs, but borrowers should have a plan to pay off the HELOC quickly.
A reverse mortgage is another option for older Americans who have significant equity in their homes. This type of loan allows borrowers to access their home equity without making monthly payments, and the balance grows over time with accrued interest and fees. While a reverse mortgage can provide additional retirement income for those who may be short on savings, borrowers or their heirs will eventually have to repay the loan, usually by selling the home. While a reverse mortgage may leave less of an inheritance for heirs, it can also relieve them of the burden of subsidizing the borrower’s retirement income.
Selling the home is another option for homeowners with high equity, as historically, home equity has been a way for people to move up the housing ladder. However, some homeowners may feel locked into their current homes due to high interest rates that would accompany a new loan for a new house. Moving and downsizing may not be financially advantageous in some cases, as the value of homes in many areas has also increased. A cash-out refinance is a last resort option that allows borrowers to replace their existing mortgage with a larger one, pocketing the difference as a lump sum. However, this should be carefully considered as it would likely lead to higher monthly payments and potentially put the home at risk.
Financial advisors recommend that homeowners carefully evaluate their options before tapping into their home equity, considering the impact on their financial stability and long-term goals. While home equity can be a valuable asset, it should be used wisely to address specific needs or financial goals. With interest rates on the rise, borrowing against home equity may not be as attractive as it was in the past, and homeowners should weigh the costs and benefits of each option before making a decision.
