Ballooning interest rates make tapping equity harder for borrowers

There's a lot of home equity to be tapped, but a lot of hurdles in doing so, a report published Thursday said.

As of the first quarter of 2023, homeowners were sitting on close to $29.3 trillion in home equity, a 64% increase compared to the same time five years ago, per research from Point, a home equity platform. 

Accessing this amount by way of taking out a home equity line of credit or a cash-out refinance has become less attractive and harder in the current economic climate, where interest rates have inched closer to 8% and credit standards have tightened. 

This creates a dynamic where homeowners' equity has grown by triple digits over the past decade, but the outstanding loan balances for home equity loans and HELOCs have dipped by 48% over the same period, Point's report said.

If a borrower wants to take out money, they will likely be paying significantly more on a monthly basis. For example, if a homeowner opts for a cash-out refinance to renovate their property, their low mortgage payment – buoyed by pandemic interest rates– could more than double.

Meanwhile, in a high-interest rate environment homeowners are much more likely to not be able to qualify for a HELOC. The denial rate for HELOCs is 46% compared to 12% for conventional mortgages, per Point's analysis of Home Mortgage Disclosure Act data.

"Americans are feeling financial stress in various ways right now: credit card debt is at all-time highs, savings rates have dipped, and inflation has dramatically increased the cost of living," said Eddie Lim, co-founder and CEO of Point, in a press release. "However, homeowners are sitting on significant wealth they could use to improve their situations but don't have a great option to access the wealth. It's like we've all lost the PIN to our debit card – we have the money but don't know how to access it."

Yet there seems to be continued interest in this product.

Last year saw the average home equity line of credit commitment volume grow by 41% to $2.4 billion per company, up from $1.7 billion in 2020, according to a report published by the Mortgage Bankers Association.

Participants of the trade group survey predict a 1.87% decline in HELOC outstandings for this year compared with 2022, but 2.03% growth year-over-year for 2024.

Companies in the mortgage space are also keeping home equity products top-of-mind. 

Most recently, Figure, the blockchain-focused fintech, announced a partnership with four independent mortgage bankers to provide a private-label home equity line of credit product as first-lien business has dipped. The four companies are CMG Financial, CrossCountry Mortgage, Fairway Independent Mortgage and The Loan Store.