Home prices have continued growing beyond expectations over the past year. Now, homeowners are sitting on $5.8 trillion in tappable equity, substantially more than ever before. Unfortunately, they aren’t tapping into this expanding mass of available equity.
Typically, homeowners will tap into home equity with home equity lines of credits (HELOCS) or cash-out refinances. With interest rates approaching 5%, however, there is less incentive for homeowners take out a HELOC, which follows variable interest rates, or conceded to a cash-out refinance at higher rates.
- Homeowners are sitting on $5.8 trillion in tappable equity, a 16% increase from the previous peak in 2006
- The average homeowner with a mortgage gained $14,700 in tappable equity over the past year
- About 80% of tappable equity is held by homeowners with rates below 4.5%, while 60% is held by homeowners with rates below 4%
The collective amount of so-called tappable equity, which is the appraised value of a home minus the 20 percent most lenders require borrowers to keep as a safety net, grew by 7 percent in the first quarter of this year compared with the previous quarter, according to Black Knight, a mortgage software and analytics company. That is the largest single-quarter growth since the company began tracking it in 2005. It is up 16.5 percent compared with a year ago.
Homeowners now have a collective $5.8 trillion in tappable equity, the highest volume ever recorded and 16 percent above the last home price peak in 2006. The average homeowner with a mortgage gained $14,700 in tappable equity over the past year and has $113,900 available to draw. This is the amount over and above 20 percent of the value of the average home.
Variable interest rate fears
But HELOCs, on the other hand, have variable interest rates, unlike the 30-year fixed primary mortgage, so the rate on a HELOC can change. A HELOC is therefore more risky because the Federal Reserve has been raising rates steadily, and HELOCs follow that.
“Who wants uncertainty when it comes to monthly finances,” said Ben Graboske, executive vice president of Black Knight’s Data & Analytics division. “I think a lot of Americans look at, what are my payments? What is my income coming in and what are my payments going out? They want certainty that they can cover their costs and not worry about it.”
Nearly 80 percent of tappable equity is held by homeowners whose current mortgage interest rate is below 4.5 percent, and 60 percent of it is held by borrowers whose rate is below 4 percent. The average rate on the 30-year fixed today is around 4.8 percent, according to the Mortgage Bankers Association.
Overall, just 1.17 percent of available equity was tapped in the first quarter of this year, the lowest amount in four years.
“I think the typical American doesn’t have that level of awareness, they’re not probably studying the numbers,” added Graboske.
Memories of the housing crash
They also may have long memories. The housing crash was 10 years ago, but the pain in the housing market is still being felt. Millions of borrowers lost their homes to foreclosure because they used them like ATMs. Some are just now able to qualify for a mortgage again.
View the original article at CNBC