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Homeowners took out home equity lines of credit at the highest interest rates in more than 20 years in the third quarter, according to a new report on household debt released Tuesday by the New York Fed.
HELOC balances increased by $23 billion in the three months ended September 30, the largest increase since 2005. This leaves the outstanding balance at $481 billion, the report said. This is the 18th consecutive quarterly increase.
According to a 2015 New York Fed report, HELOC balances reached approximately $714 billion in the first quarter of 2009.
The current increase in balances comes amid a weak housing market, due at least in part to the so-called mortgage rate lock-in effect. Just under half (49.1%) of mortgage balances in the second quarter had interest rates of 4% or less, according to Realtor.com’s analysis of federal mortgage data, with many owners reluctant to forgo lower interest rates to buy another home with current high borrowing costs.
The median price of an existing home in September was $417,500, according to the National Association of Realtors, a real estate industry group. That’s only a 1.3% increase from a year ago, but nearly 54% from September 2019, according to NAR. The average interest rate on a typical 30-year fixed-rate mortgage was 7.3% as of Tuesday, according to Mortgage News Daily.
“With a HELOC, you can borrow against your equity without giving up the low interest rates on your home,” says Douglas Bonepers, a certified financial planner and president and founder of Born Fied Wealth in New York City and a member of CNBC’s Council of Financial Advisors.
Mortgage holders have $17.5 trillion in equity
Mortgage holders held a total of $17.5 trillion in home equity as of the third quarter, according to a new report from Intercontinental Exchange (ICE), a financial markets technology and data company.
Accessible tap equity (meaning a homeowner’s equity remains at least 20% of the home’s value after tapping) increased 1.2%, or $16,600, from a year ago to an average of $204,000 per borrower, the ICE report shows.
“Homeowners have significant home equity, with 2.4 million mortgage holders currently owning at least $1 million in equity,” Andy Walden, ICE’s head of mortgage and housing market research, said in the report.
Average HELOC rate is 7.49%
A HELOC allows you to tap into a line of credit over time when you need money, rather than all at once like with a mortgage or cash-out refinance.
HELOCs may have lower upfront costs than home equity loans, but they typically have variable interest rates. This means that interest rates rise and fall based on a benchmark like the prime rate, which banks use as a basis for setting interest rates on various loans. And although the Federal Reserve does not control that interest rate, it is affected by changes the Fed makes to the so-called federal funds rate.
“If a budget only works at today’s rates, it doesn’t really work,” Vonepers said of HELOCs. “We need to be mindful of the fact that interest rates may rise.”
If a budget only works at today’s rates, it doesn’t really work.
Douglas Bone Perth
President and Founder of Bone Fide Wealth
As of Nov. 4, the average interest rate on a $30,000 HELOC was 7.49%, according to Bankrate.
Many HELOCs have a “withdrawal” period during which you can withdraw your funds, usually lasting five or 10 years. During that time, you typically only have to pay interest on the funds you withdraw. However, after that, you enter a repayment period of, say, 10 or 20 years, during which you have to pay both interest and principal. Therefore, if you only pay interest, the amount you pay will skyrocket.
“The real test is when the repayment period begins and the principal begins to appear, if that’s how the HELOC is structured,” Vonepers said. “Payments can double overnight and you want to know that before you sign anything.”
Also, think about what you plan to spend the money on, says Bonepers.
“If you’re borrowing money against your home to make improvements to your home, it might make a lot of sense,” Vonepers says. “It’s a little harder to take out debt on your home to pay off your credit cards, because you’re turning an unsecured debt into a debt secured by a roof over your head.”
In that case, if spending habits don’t change, “you’re just moving the problem somewhere a little more scary,” he said.
