Is the Home Equity Window Closing?
With mortgage rates at record lows the last few years and home values increasing in many areas of the country, it has been a good time for homeowners to tap some of their home’s equity to pay off some bills or fix up their home.
For homeowners who are on the fence about getting a home equity loan or home equity line of credit, also called a HELOC, a slow rise in interest rates set by the Federal Reserve may be reason enough to get a loan now. And if they see home values decreasing in their area, it can be another potential sign that the window for getting a good home equity loan is closing, or at least shrinking so that they can pull more money out of their home.
Are home equity loans becoming smaller and harder to get? Are they still a good deal? It depends on a number of factors — starting with interest rates, your home’s value and the equity you have in it — but also others that you may not think of.
First, the good news
Millions of people — 13.6 million U.S. properties during the second quarter of 2018 — are holding equity-rich real estate, according to the U.S. Home Equity & Underwater Report by ATTOM Data Solutions. That’s almost a quarter of all U.S. properties with a mortgage. Only about 9 percent of homes were underwater, meaning they’re worth less than the price paid for them
The report considers a home equity-rich if the debt secured on the property is equal to half or less of the property’s estimated value. So a home valued at $300,000 could have up to $150,000 in debt and still be equity-rich.
High home prices and valuations increase equity. Lenders typically allow you to borrow against up to 75-90 percent of the value of your home, your primary mortgage included. With the home as collateral, interest rates for home equity loans can be significantly lower than for unsecured debts such as credit cards and personal loans.
Let's say you have a home valued at $300,000, the balance owed on the mortgage is $150,000 and the lender will allow you to borrow against 80 percent of your home value. Eighty percent of $300,000 is $240,000, minus $150,000 owed on the mortgage gives you $90,000 available to secure a home equity loan.
Effects of rising interest rates
As interest rates slowly start to rise — for mortgages and home equity loans, among other types of loans — that can be enough to convince homeowners who already have lower rates on their home loans to stay in their homes and take out a home equity loan or HELOC for home renovations because they can’t afford to go back into the housing market. If they move, they could see their mortgage interest rate rise under a new loan.
“The average homeowner will live in their home about seven years before a move,” says Lauren Hazelett, a real estate agent in Oregon. “Many of the homes being sold right now have amazing interest rates that people don’t want to give up. I see more buyers turning to a home equity loan rather than selling their current property than before.”
What if home prices drop or sales slow?
Falling home prices can be bad for homeowners because dropping home valuations can lead to less equity. Slowing home sales, however, don’t necessarily equate to declining home values, says Craig Martin, managing director of wealth and lending at J.D. Power.
Existing-home sales fell for the fourth straight month in July to their slowest pace in more than two years, according to the National Association of Realtors. They fell 0.7 percent from June to July.
But fewer sales doesn’t equal lower home values. Home prices could still be on the rise, Martin says, with fewer potential buyers able or wanting to buy. A “meaningful shift downward” in home values would be needed to impact home equity loans or HELOCs, he says.
Still, if home prices don’t rise as fast as owners are used to in the recent past, then they could be less likely to get a HELOC, Martin says. Homeowners could also be dissuaded from taking out a home equity loan to invest in home improvements if those costs aren’t going to be recouped by selling the home soon because home prices aren’t rising, he says.
For owners who already have a home equity loan, falling home values can affect how much money the lender will allow them to borrow, says Bruce Ailion, a real estate agent at Re/Max Town and Country in Atlanta.
“Should values decline or your credit circumstances change the lender often has the right to limit the amount you can borrow,” Ailion says. “This can be done without much if any warning, by reducing the amount from say the $100,000 originally approved to $50,000 or as may be the case the outstanding balance if you have borrowed more than the lender would in the current environment allow.”
Borrowers should consider increases in inventory, price reductions and continued increases in interest rates as signs that home prices may be weakening, he says.
Still a good deal
For now, home equity loans seem to be a good deal for many homeowners, especially if their home’s value is increasing and they’re using the lump sum they’re borrowing for home renovations and not using their home equity as an ATM to take a vacation.
Closing costs can be low or not required, and borrowers only pay a set interest rate on the amount they take out.
“For the right purpose, it’s still very cheap money and it makes sense,” says Ralph DiBugnara, vice president at Residential Home Funding in New York City.