Homeowners Tapping Into Equity
More Equity Than Expected
Do you have equity in your home and not using it?
Fast-rising home prices have given homeowners more equity than many expected, and these homeowners are now tapping into that equity at the fastest rate in eight years. Homeowners have gained a collective $570 billion throughout 2016, bringing the number of homeowners with “tappable” equity up to 39.5 million, according to Black Knight Financial Services and now these borrowers have at least 20 percent equity in their homes.
But the fact that mortgage rates were lower last year makes it less likely today’s borrowers would want to refinance this year. About 68 percent of “tappable” equity belongs to borrowers with mortgage rates below today’s levels. The vast majority of these borrowers, more than three-quarters, also have FICO credit scores well above average, which gives them more options for cashing out on their homes.
Enter the HELOC
Enter the HELOC (Home Equity Lines of Credit) which are second loans taken outside the primary mortgage, and millennials are leading the pack to cash in. More millennials are using HELOCs than Gen-Xers or baby boomers. In fact, more than a third of millennials said they are considering applying for a HELOC in the next 18 months, which is more than twice the rate as Gen-Xers and nine times that of baby boomers.
Home remodeling was the No. 1 reason for taking out a HELOC last year, with debt consolidation coming in second. The home remodeling industry has seen a huge boost in the last year, as home prices rise and the supply of homes for sale shrinks. (Yes, we are in a seller’s market) With the lack of inventory, homeowners are finding it harder to find and afford a suitable move-up home, so they are increasingly choosing to stay and remodel.
Millennials are entering the housing market more slowly than previous generations, and those who have in the past few years have tended to buy cheaper fixer-uppers. In just a few years, however, they’ve gained enough equity from rising prices to be able to pull cash out and remodel, turning their “Handyman Specials” into beautiful properties for first-time homebuyers. They are, however, still very conservative. Borrowers doing cash-out refinances last year still had close to 35 percent equity left in their home, the lowest on record, with an average credit score of 750, according to Black Knight. Borrowers are still using HELOCs at barely one-third the rate they did in 2005.
Cash-out refinances accounted for nearly half of all refinances in the last quarter of 2016, as homeowners withdrew $31 billion. That was the most since 2006 and represented a 50 percent increase from the same quarter of 2015.
Millennials appear to be more focused on value than amenities. Close to half said they would renovate their homes to increase value while other generations said they wanted the house to look more “up to date.” Millennials seem to want to avoid leveraging their homes the way their parents did, choosing to hold on to more equity and trying to grow it as much as possible.