Americans are sitting on home equity worth nearly $30 trillion

home equity
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On paper, many Americans appear to be wealthy in real estate.

According to the St. Louis Federal Reserve, homeowners currently have about $30 trillion in home equity as a result of rising housing prices, just shy of the peak in 2022.

The amount most lenders will allow you to withdraw from your equity while still leaving 20% equity in the home as a safety net equals about $200,000 in cash per homeowner and is the maximum amount that can be tapped.

How to get money out of your house

Refinancing and taking cash out were two common ways to access the equity you’ve built up in your house up until last year. That becomes far less enticing now that mortgage rates are over 7%.

Borrowers are more likely to take out a second loan to withdraw cash even when their home equity is high than to lose their current low rate through a cash-out refi.

A home equity line of credit, or HELOC, on the other hand, enables you to borrow money against a portion of the equity in your house. A HELOC is a revolving line of credit that you can use as needed or keep on hand, replacing a house loan with a fixed amount and offering better rates than a credit card.

According to the Mortgage Bankers Association, or MBA, the originations of home equity loans and HELOCs grew by 50% last year compared to two years prior.

“Given the nearly $30 trillion in accumulated equity in real estate, there is untapped potential for home equity lending for lenders and borrowers,” said Marina Walsh, MBA’s vice president of industry analysis.

Consider the terms, rates, and dangers of home equity

The terms of home equity loans can differ significantly across the country, according to a LendingTree research that examined more than 580,000 offers. 

According to LendingTree, homeowners can borrow an average of $104,102 for home equity loans. Homes in Iowa had the best terms, with an average interest rate of 9.88%, two percentage points higher than Maryland’s lowest average interest rate of 7.88%.

Rates are still far lower than those for borrowing on credit cards, which typically charge around 20%, at less than 10%.

Nicole Bachaud, senior economist at Zillow, noted that while it is possible to withdraw money from your house, it is not simple. “Not everyone will be eligible to receive an additional loan.”

When the Covid epidemic was at its worst and lenders tightened their rules to lower their risk, fewer institutions offered this option. HELOCs are now more widely available, but the best terms are still reserved for borrowers with excellent credit histories and low debt-to-income ratios.

In addition to being more difficult to qualify for than other types of loans, defaulting on a home equity loan can have major negative effects, according to Channel. He highlighted that in some extreme cases, defaulting on a home equity loan could result in you losing your home.

Even now, “borrowers shouldn’t rush out to get a home equity loan until they fully understand all of the risks associated with them,” Channel said.

Remember that various lenders will provide various terms and interest rates, advised Bachaud. Before choosing what makes the most sense, she advised speaking with various mortgage companies or loan officers and analyzing all the charges.

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