Americans are tapping home equity despite jump in rates

Soaring mortgage rates aren't stopping plenty of U.S. property owners from tapping home equity — even if it means locking in a steep increase in their monthly repayments.

In July, 86% of refinance deals required homeowners to pay a higher interest rate, the biggest share on record, according to data from Black Knight, an analytics firm for the mortgage and home-equity industry. The rate increased by an average of 1.3 percentage points, also a record high, the data show. Two years ago, virtually all refinance loans lowered the mortgage rate even if they pulled equity too.

Soaring house prices in recent years have left Americans with record levels of equity in their homes. Over the last decade, an estimated $20 trillion in home equity has been created, according to the Federal Reserve. Roughly half of mortgaged homes have an equity position greater than 50% of the property's value.

As U.S. interest rates rose in the first half of this year, the share of mortgages that are refinance loans dwindled to about one-third of all applications. But that share has held fairly steady since then, even as mortgage rates climbed higher still. And last week, the Mortgage Bankers Association reported a 10% jump in refinance loans.

'Strong guess'

Those deals are being driven by the need for cash, according to Black Knight. The cash-out share rose to 97% of all refinance transactions in July, compared to about one-third two years earlier.

Home improvement and debt consolidation are the two biggest areas where homeowners spend the money, says Mark Schacknies, chief executive of digital home-equity firm NFTYDoor.

"Whereas mortgage rates are high, credit-card rates are even higher," he says. "Home equity remains, and will always be, the most affordable way to finance important things in one's life."

Another trigger for borrowing could be expectations of a housing-market correction. An August survey by Fannie Mae found that consumers anticipate home prices will fall over the coming year, which would make refinancing more difficult.

Schacknies said his "strong guess" is that the final numbers for 2022 will show a surge in home-equity borrowing. "We've seen strong demand, and I know the other competitors are also experiencing this."