Homeowners Tap Equity as HELOC Balances Post Biggest Jump Since 2005

According to a new Federal Reserve Bank of New York report on household debt, U.S. homeowners tapped their home equity lines of credit (HELOC) in the third quarter at the highest rate in more than two decades.

The report noted that HELOC balances jumped $23 billion during the three months ending Sept. 30, the largest increase since 2005. That brings the outstanding amount owed to $481 billion, the report shows.

This also marks the 18th consecutive quarterly increase, the report noted.

According to a 2015 New York Fed report, HELOC balances peaked at roughly $714 billion in the first quarter of 2009.

CNBC reported that the current rise in balances comes amid a sluggish housing market, due at least partly to the so-called mortgage rate lock-in effect.

Reluctance to Give Up Low Rates

A little less than half of outstanding mortgages — 49.1% — carried rates of 4% or lower in the second quarter, according to a Realtor.com analysis of federal mortgage data. That leaves many owners reluctant to give up their low rates to purchase another home at current higher borrowing costs.

According to the National Association of Realtors, the median price of an existing home was $417,500 in September. While up just 1.3% from a year earlier, the amount is nearly 54% higher than in September 2019, the NAR noted.

“HELOCs let them borrow against their equity without giving up the low interest rate on their home,” said certified financial planner Douglas Boneparth, President and Founder of Bone Fide Wealth in New York City and a member of CNBC’s Financial Advisor Council.

Collectively, mortgage holders had $17.5 trillion in home equity as of the third quarter, according to a new report from Intercontinental Exchange, or ICE, a financial markets technology and data company.

Tappable equity that can be accessed, which means a homeowner’s equity would remain at or above 20% of the home’s value after tapping it — rose 1.2%, or $16,600, from a year ago to an average of $204,000 per borrower, the ICE report shows.

“Homeowners are sitting on substantial housing wealth, with 2.4 million mortgage holders now holding at least $1 million in equity,” Andy Walden, head of mortgage and Housing Market Research at ICE, said in the report.

Average HELOC Rate is 7.49%

CNBC noted that HELOCs allow you to tap a line of credit over time as you need the money, rather than getting it all at once like a home equity loan or cash-out refinance.

While HELOCs may have fewer up-front costs than a home equity loan, they generally have a variable interest rate.

That means it will move up and down based on a benchmark like the prime rate, which banks use as a basis to set rates on a variety of loans, CNBC noted. While the Fed doesn’t control that rate, it is influenced by changes the central bank makes to the so-called federal funds rate.

“If your budget only works at today’s rate, then your budget doesn’t really work,” Boneparth said of HELOCs. “You kind of have to be mindful of the fact that rates may go up.”

CNBC said that many HELOCs also have a “draw” period when you can take money out that often lasts five or 10 years.

It said that during that time, you typically are only required to pay the interest on any funds you’ve withdrawn. After that, the borrower will enter a repayment period of, say, 10 or 20 years, when they are required to pay both interest and principal. Because of that, the payments will jump if you’ve only been paying interest.

“The real test comes when the repayment period kicks in, and the principal starts to show up, if that’s how their HELOC is structured,” Boneparth said. “Payments potentially could double overnight, and you really want to know that before you sign anything.”

He said you should consider what purpose you’re planning to use the money for.

“If you’re borrowing against your home to improve your home, that could make a lot of sense,” Boneparth said. “Borrowing against your house to pay off credit cards is a little trickier because you’re turning unsecured debt into debt secured by the roof over your head.”