America’s homeowners are sitting on a mountain of home equity cash due to exploding home prices.  Now they have to decide how to deal with their extra cash.

Home Borrowers Had Collective Home Equity of $9.4T at End of Q3 2021

According to Black Knight, American homeowners who have mortgages had a collective record-high of $9.4T in tappable home equity, or an average of $178,000 per individual borrower, at the end of Q3 2021.

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Tappable home equity is the amount of money a borrower can take out of their homes while still leaving at least a 20% cushion of their respective home equity in their homes.  This average of $178,000 per borrower represents an increase in home equity of +32% y/y.

Not only did tappable home equity climb by the end of Q3 2021, homeowning borrowers began taking equity out of their homes during Q3 2021 at the highest rate in 14 years.  This “taking out” was considered by many to be a no-brainer since interest rates were low at the end of Q3 2021.   According to Mortgage News Daily, the average rate on a 30-year fixed rate mortgage was under 3%.

Rates Already Seeing Uptick Above 3% & Expected to Increase in 2022

Currently, Black Knight estimates that approximately 24% of US homeowning borrowers have interest rates below 3% on their first lien mortgages.  Taking out home equity lines of credit, which generally have variable interest rates and become a second lien on the house, means that borrowers may have to deal with more expensive “cash-out” rates.  Higher rates are coming as the Fed gradually shifts to inflation fighting policies from its pandemic economic boosting policies.

Remember, not only do borrowers have to pay the interest on money they take out of their accrued home equity, borrowers of equity credit lines have to pay on the principal of their equity line. 

Various Options for Borrowers to Consider

According to Andy Walden, vice president of market research with Black Knight, “You (home equity borrowers) have to take the whole picture into consideration – current debt amount and associated interest rates, how much you’re looking to borrow, available HELOC vs. cash-out rate offerings, timeline for paying off the additional debt, and so on.  To make the best decision, homeowners need to run the numbers both ways and see what makes the most sense for their particular case.”

Mathew Weaver, vice president with CrossCountry Mortgage, said, “The advantage of the line of credit is that it is flexible with low upfront costs, however the disadvantage is that most carry a variable interest rate that will change and likely increase over time.”

Weaver is in favor of taking out an equity credit line “…when the financial need is short term and there is a defined plan in place to pay it off over the next 24 to 36 months.  Also, taking cash out of the home equity credit line to invest in something else with a higher return rate could justify taking a slightly higher interest rate on that potential investment as long as the borrower considers both the possible risks and rewards of that new investment against the extra cost of debt that accompanies the new investment.  After all, an investment home, stocks, cryptocurrencies, metaverse real estate NFTs, and whatever else all present different risks and rewards.”

Eyes open.

Thanks to CNBC.

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