With untapped home equity at an all-time high of $14.4 trillion, homeowners could be poised to start cashing in, new research suggests.
Home equity — the difference between a property's value and the amount owed on it — is about $1 trillion higher than its peak in 2005 before the Great Recession, according to a TransUnion study released this week. By 2009, the level had dropped to about $6 trillion as the housing market struggled to recover.
"Consumers have been building up that equity over the last seven years or so," said Joe Mellman, senior vice president and mortgage business leader at TransUnion. "It has really come roaring back."
Interest on a HELOC is typically tax-deductible only if you use the money to finance home improvements — one reason a home equity line is most commonly used for this purpose.
With interest rates rising on consumer debt, home equity loans or lines of credit could be an appealing option for consumers looking to borrow money at a lower cost, Mellman said.
"When rates were low, consumers were taking out equity by refinancing their mortgage," Mellman said. "Now, with [mortgage] interest rates up, a lot of people might not want to touch their original mortgage."
In other words, if refinancing would mean paying a higher interest rate on your primary mortgage, it might not be a wise move.
The average rate on a 30-year traditional mortgage is now 5.01 percent, according to Bankrate. The average interest rate on a home equity loan is around 6 percent.
Why consumers tap their home equity Use Description Percent using* Major expense Take cash out, often for a large expense like home remodeling 91 percent Debt consolidation Consolidate balances from other accounts 41 percent Refinance Refinance to get a better rate or term 23 percent Piggyback Concurrent with a mortgage origination, often used for down payment 4 percent Undrawn Not used immediately (i.e., a rainy day fund) 2 percent Source: TransUnion * Based on 2.4 million home equity loans originated between July 2016 and June 2017
The research found about 70 million homeowners would likely qualify for a home equity loan or line of credit.
However, there are some things to consider before signing up.
For starters, the tax break you could get for using home equity this way is no longer guaranteed.
As of this year, you can only deduct the interest on home equity debt if it's used to buy, build or improve your home. You also can only write off interest on up to $750,000 in home loans, which includes your mortgage and any home equity loan or line of credit.
So if you tap your home equity to pay off, say, credit card debt or student loans, you cannot deduct the interest. However, you still might be able to pay off the debt faster if the interest rate is lower than what you were paying.
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Additionally, be aware of exactly how the account works. If the interest rate is variable, it could fluctuate from year to year, moving higher or lower based on where rates are at each adjustment.
Also be aware of the draw period with home equity lines of credit. This is when you only pay interest, not any of the principal. When that draw period ends — say, 10 years out — your monthly payments can jump significantly as the lender requires you to begin paying down the principal as well.
Remember, too, that you are putting your home up as collateral when you tap your equity.
"You want to make sure you're being safe in your decision-making about that," Mellman said.
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