Many Homeowners Have Strong Home Equity – Here’s how to Tap it

If you own a home, chances are that your earned equity remains strong.

That’s good news for many homeowners who might want to finance large expenses such as home improvements, student loans, or to consolidate high-interest debt.

Learn more about the latest home equity findings, why robust values persist for many homeowners, how to accurately determine your home’s equity, and the best ways to pull it out.

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What the latest reports reveal

A 49% share of mortgaged residential properties in 45 of the country’s 50 states are regarded as equity-rich, according to ATTOM’s second quarter 2023 US Home Equity & Underwater Report.

That means the combined estimated amount of loan balances of those homes was no more than half of their estimated market values. The 49% mark grew from 47% in the first quarter of this year and the highest point measured in at least four years.

These findings contrast with CoreLogic’s first quarter 2023 study, which revealed that home equity actually decreased among US mortgaged homeowners by 0.7% year-over-year, for a loss of $5,400 per home and a total of $108.4 billion. This represents the first annualized loss of equity on mortgaged properties since early 2012.

Homes with negative equity (also called being underwater, or owing more on your mortgage than your home is worth) totaled 1.2 million residences, representing 2.1% of all mortgaged properties. The CoreLogic report also revealed good news: the typical US homeowner accrued a significant amount of equity, with an average of $274,000 per home versus $182,000 prior to the pandemic.

Further, the Mortgage Bankers Association’s Home Equity Lending Study showed home equity loan and home equity line of credit (HELOC) originations jumped 50% in 2022 compared to 2020. Commitments to HELOCs and home equity loans averaged $2.1 billion nationwide; with HELOCs accounting for 85% or about $1.8 billion of that.

Remodeling and renovation increased demand for these home equity products in 2022, with nearly two thirds of borrowers naming home improvements as a reason for pursuing a home equity loan. Other reasons included debt consolidation (25%) and emergency cash management (10%). Average weighted balances on outstanding HELOCs increased from $108,231 in early 2022 to $112,113 by late 2022 versus $52,653 to $61,114 for home equity loans over that same time.

What we can learn from this data

ATTOM CEO Rob Barber is encouraged by his report’s latest findings.

“Home equity levels rising again after two straight small declines are another sign that windfalls and economic benefits from the nation’s decade-long housing market boom may not be ending just yet,” he said. “Equity, just like home seller profits, went back up between the first and second quarter of 2023 as the housing market turned around, at least temporarily. Consider that the median national home price jumped 10% quarterly after dipping 7% from the middle of last year into the early months of 2023. Median home values were also up this spring in 90% of metro areas with enough data for us to analyze.”

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Barber notes that rising home prices up the estimated value of all properties, which generally improves equity.

“Prices – and by extension, equity – went up in the second quarter as several factors combined to put more financial resources in the hands of house hunters,” he continued. “Home mortgage rates were down by a half to three-quarters of a point for a 30-year fixed-rate loan after more than doubling in 2022 to about 7%. At the same time, consumer price inflation dipped down under 4%, the stock market improved after a year of ups and downs, and unemployment remained less than 4%.”

These factors coalesced just as the peak annual purchasing season revved up. They also dovetailed at a time when the inventory of homes for sale around the country remains historically low.

Selma Hepp, executive chief economist for CoreLogic, isn’t surprised that homeowners have been tapping into their equity more in recent years.

“The number of HELOCs increased some 30% in 2022 from the year before and reached the highest level since 2007,” she noted. “The regions with the highest increases in HELOCs last year were correlated with strong price gains – Nevada, Florida, and Arizona saw the largest increases in 2022, for example.”

Hepp points out that the average home equity peaked at $297,000 in the first half of 2022, aligning with a peak in home prices.

Considering that there are 63 million mortgaged properties in the United States, a healthy level of accrued equity bodes well for many homeowners who need extra money.

“Even just a 5% increase in the value of your home could easily add upwards of $10,000 in wealth over just three months,” Barber explained. “A 5% jump in your property’s value would increase your equity by $12,500 on a fairly modest home valued at $250,000.”

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Indeed, homeowners today can increasingly benefit from hundreds of billions of dollars in added wealth in the form of equity growth. That equity can be used for a myriad of financial goals – including home improvements, paying for tuition or major bills, investing in a new business, purchasing goods and services, and even buying a second or vacation home, added Barber.

How to calculate your current home equity

Determining your home equity value is relatively simple, although it may cost you a bit if you want the most accurate results.

“You start by figuring out the current market value of your home. This can be done by paying for a professional home appraisal. Or, you can ask a real estate agent for a comparative market analysis or examine recent sales of similar homes in your area,” suggested James Allen, a certified public accountant, certified financial planner, and founder of Billpin.com. “Once you have your current market value, you subtract the amount you owe on your mortgage. The result is your home equity.”

Case in point: If your home is worth $300,000 and you owe $200,000 on your mortgage loan, your home equity is $100,000.

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How to tap into your home equity

You can liquidate equity from your home in several ways, including a HELOC, home equity loan, and cash-out refinance. Each option has its pros and cons.

HELOC

A home equity line of credit (HELOC) offers a valuable financial resource by converting your home’s equity into accessible cash.

It operates similarly to credit cards, providing a revolving line of credit with a pre-set spending limit. This means you can withdraw funds up to the credit limit whenever needed and replenish your available credit as you pay down the balance with interest. Though HELOCs have distinct characteristics that set them apart from credit cards.

Firstly, they come with a defined “draw period,” during which you can access the credit line. Once this period ends, you can no longer borrow and must start repaying the outstanding balance. Secondly, HELOCs are secured loans backed by the value of your home, resulting in lower interest rates compared to credit cards or personal loans. However, it also means that your home is at risk of foreclosure if you fail to make timely loan payments.

While HELOC interest rates are generally higher than standard mortgage rates, they often remain lower than home equity loan rates. Nevertheless, like credit cards, HELOCs typically have variable interest rates linked to public indices, such as the prime rate or U.S. Treasury bill rate. As these rates fluctuate, the cost of credit also varies, making it challenging to predict expenses accurately compared to fixed-rate home equity loans or cash-out refinancing.

Home equity loan

A home equity loan presents a unique borrowing opportunity, allowing you to leverage the cash value of your home at a fixed and often lower interest rate.

Functioning as a “second mortgage,” it serves as an additional loan alongside your primary mortgage, enabling you to access your home’s value without altering the terms or rate of your primary mortgage. Alternatively, if your home is fully paid off, you can borrow only the amount you require.

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Unlike a cash-out refinance, a home equity loan serves the sole purpose of borrowing cash without affecting your existing mortgage balance or primary mortgage’s rate and term. Instead, it stands as a separate loan with its distinct interest rate and monthly payment, earning it the name “second mortgage.”

Home equity loans operate similarly to standard home loans, typically offering fixed rates and fixed monthly payments with terms ranging from 10 to 30 years. The interest paid on this type of loan is tax-deductible when used to purchase or construct a property or substantially improve an existing property.

These loans are attractive due to their lower interest rates compared to credit cards and personal loans. However, since your home serves as collateral, missing loan payments could lead to foreclosure.

Cash-out refinance

Through a cash-out refinance, you can unlock the potential in your home by replacing your existing mortgage with a larger one.

When you opt for a cash-out refinance, you simultaneously tap into your home equity while refinancing your mortgage. By taking out a new loan larger than your current mortgage, you pay off your existing home loan, and the surplus amount is returned to you in cash.

It’s important to note that cash-out refinance rates are typically slightly higher than traditional mortgage refinance rates. The interest rate you receive will be influenced by your credit profile and the amount of cash you decide to take out. In most cases, you can cash out up to 80% of your home’s equity.

While the new loan will be larger, leading to more mortgage interest paid in the long run, cash-out refinancing remains favorable as mortgage rates tend to be lower than those of personal loans or credit cards. This makes it an attractive option for financing significant expenses.