Home equity in the U.S. is at near all-time highs, with total home equity for mortgage holders exceeding $17 trillion in Q1 of 2024. This increase is largely due to a rise in home prices and homeowners taking advantage of low-interest rates to refinance their mortgages. However, despite the significant increase in home equity, financial advisors warn that tapping into this wealth may be challenging due to high borrowing costs. Interest rates have risen in recent years, making some options less attractive than they were before.
One common way to access home equity is through a home equity line of credit (HELOC), allowing homeowners to borrow against their home equity for a set term. HELOCs have an average interest rate of 9.2%, which is lower than credit card rates but higher than typical mortgage rates. Borrowers can generally tap up to 85% of their home value, but financial advisors caution that borrowers should have a specific plan to pay off the HELOC quickly to avoid accumulating debt.
Another option for older Americans looking to tap into their home equity is a reverse mortgage, which allows borrowers to access their home equity without making monthly payments. However, the loan balance grows over time with accrued interest and fees, and borrowers or their heirs will eventually have to repay the loan. While a reverse mortgage can provide a potential source of retirement income for those who have much of their wealth tied up in their home, it may leave less of an inheritance for heirs.
Selling your home is another option to access home equity, allowing homeowners to amass more money to put into a future home. However, homeowners with low fixed-rate mortgages may feel locked into their current homes due to the high rates associated with new loans. Moving and downsizing may not be financially advantageous due to the increased value of homes in the area. Financial advisors suggest carefully considering the financial implications of selling a home before making a decision.
A cash-out refinance is another option to access home equity, where borrowers replace their existing mortgage with a larger one and receive the difference as a lump sum. However, financial advisors caution against this option as a first resort, as it can result in higher monthly payments and increased debt. Borrowers considering a cash-out refinance should carefully evaluate their financial situation and consider other alternatives before proceeding.
Overall, while home equity is at near all-time highs in the U.S., tapping into this wealth may be challenging due to high borrowing costs. Financial advisors recommend considering all options carefully and having a clear plan in place before accessing home equity to ensure that it is used effectively and responsibly.
