Equity-rich Americans tap homes for cash as debt spikes
"Frittering that away on things you don't really need, which did happen quite a bit back in the run up to the Great Recession, can be a terrible way to use that equity.” (Photo: Ronda Churchill)
Homeowners in the U.S. are sitting on hundreds of thousands of dollars in equity on average, and are putting it to work, in some cases to pay for necessities.
“Rates have gone up, so if you just want to get some cash out, it’s worth just getting an equity loan,” says Brian Almero of Highland Residential Mortgage. Almero says about half of his clients are using equity to pay off credit cards or other loans, while about a quarter use the money to improve their homes.
“We’re seeing more debt consolidation than anything else,” says Andrew Leavitt of PIF Lending in Las Vegas, who says he’s witnessed an uptick in equity borrowing. “Gas went up overnight, and milk, and eggs. So it’s part of trying to deal with credit cards or other burdens to pay.”
Credit card debt increased by $38 billion in the third quarter of 2022 over the second quarter, the Federal Reserve Bank of New York reported, while credit card balances spiked 15 percent year-to-year, the biggest increase in 20 years.
Home equity in the U.S. peaked in the first half of 2022 at an average of just under $300,000 per property, according to CoreLogic, and grew an average of 15.8% between Oct. 2021 and Oct. 2022, a slow down from previous quarters, but still a gain of $2.2 trillion.
Nevada homeowners gained an average of $40,000 in equity for the third quarter year-to-year while U.S. homeowners gained an average of $34,300 during the same period. That’s down from $60,000 year-to-year for the second quarter, according to CoreLogic.
Of the Metro areas surveyed by CoreLogic, Las Vegas has the lowest share of homes with negative equity (0.7%), followed by Los Angeles and San Francisco, where .8% of properties are underwater.
Equity fluctuates with the market. It increases as values rise and as property owners pay down their mortgage principal. For most people, it’s a key factor in accumulating wealth. But it can also plummet when homeowners extract cash or real estate values decrease, as they did during and after the Great Recession.
In March of 2013, more than half of Nevada properties (52%) were worth less than their mortgages, according to CoreLogic.
Homeowners with as little as 15% equity can tap into it in one of three ways – by refinancing their first mortgage for a larger amount; by taking a fixed-rate second mortgage; or by establishing a home equity line of credit (HELOC), which requires relatively little in the way of documentation and offers enticing introductory rates.
“We’re seeing more of the HELOC or the second mortgages because people with low-rate first mortgages in the two, three, and four percent range don’t really want to mess around with those too much,” says Leavitt.
Equity loan originations increased 4.2% in the third quarter of 2022 over the previous quarter, according to Inside Mortgage Finance.
In the first two quarters of 2022, lenders nationally originated more than 807,000 HELOCs, amounting to $131 billion in added debt. The number and amount of HELOCs were up 30% year-to-year, according to CoreLogic.
HELOC originations in the third quarter totaled 364,921, up 47.8% from the previous year, according to real estate data analyst ATTOM, which reports 20% of mortgages closed in the third quarter were home equity loans.
HELOCs, which are adjustable, interest-only loans, can be approved without an appraisal or income verification, says Leavitt.
“So if you’ve been laid off, or if your finances have changed and you can’t qualify for a traditional product, or your score has dropped, you can still get the loan for $100,000 or $200,000 based on the equity,” says Leavitt. But he cautions the introductory low-interest payment can quickly double or triple, depending on the prevailing market rate. “People sign up for a $50,000 mortgage at a 1.99 rate, which is fantastic. then six months later it jumps to what the current market rate is. And it’s still interest-only.”
Leavitt says HELOCS are “absolutely your best bet” if you have a certain exit strategy from the loan. Otherwise, a higher-rate, cash-out loan provides more options and time to pay it back.
Rick Sharga, a marketing executive with ATTOM, reports “a pretty dramatic increase year-over-year in our numbers in terms of HELOCs. If you use the equity in your home to pay down debt, you have to be careful not to run up those credit card bills again, because you’ll find yourself in exactly the same position as before except with reduced equity.”
Shagra also warns against spending equity frivolously.
“One of the benefits of homeownership has been that you build up that equity and that’s something that helps to provide financial stability,” he says. “A lot of people have baked that into their retirement plans. In some cases it’s even a source of intergenerational wealth. So frittering that away on things you don’t really need, which did happen quite a bit back in the run up to the Great Recession, can be a terrible way to use that equity.”
Sharga says the threat of homes sinking underwater again is “not as likely to happen this time for two reasons: Lenders have more stringent guidelines” that prevent borrowers from stripping the equity from their homes, and “a wholesale drop in prices like we saw isn’t at all likely in the current market. But it’s still something people need to keep in mind.”
The median price of a home in Reno is $519,950, down from a peak of $570,000 in May. In Southern Nevada, the median price of a home has plummeted to $425,000 in December, from a peak of $482,000 in May.
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