In the shadow of the housing crash of 2008 homeowners are sitting on a record amount of cash — this untapped cash reserve could keep you from becoming another statistic if the market crashes again...
There is currently a record collective of $5.8 trillion in tappable equity held by homeowners throughout the US.
The average amount in the past year for a homeowner with a mortgage was a gain of $14,700 in tappable equity and currently available to draw amount of $113,900. Consumer confidence in the housing market, which has been quite bullish, is actually dropping now.
Here’s a fact you don't hear every day; U.S. homeowners are getting wealthier by the minute, and yet they are less likely to tap into any of this wealth than at any other time in history. Because home values are rising but the amount of people taking out in home equity is shrinking, we are seeing home equity lines of credit flatlining.
This tappable wealth is figured at the appraised value of a home minus the 20 percent most lenders require borrowers to keep as a safety net. In the first quarter of this year alone this amount grew by 7 percent when compared with the previous quarter. Mortgage software and analytics company Black Knight says “that is the largest single-quarter growth since the company began tracking it in 2005”. Compared with a year ago it's up 16.5 percent compared.
These statistics reveal that homeowners now have $5.8 trillion in tappable equity. This is the highest volume ever recorded and is a full 16 percent above the peak in 2006. As we speak, the average mortgage holder gained $14,700 in useable equity over the past year and has a total of $113,900 available at their disposal. This is the amount over and above 20 percent of the value of the average home.
What about variable interest rate mortgages?
Unlike the 30-year fixed primary mortgage, the rate on a HELOC or variable rate mortgage can change. With the Federal Reserve raising rates steadily the HELOC is riskier because they follow that.
Ben Graboske, executive vice president of Black Knight’s Data & Analytics division says, “Who wants uncertainty when it comes to monthly finances. I think a lot of Americans look at, what are my payments? What is my income coming in and what are my payments going out? They want certainty that they can cover their costs and not worry about it.”
Homeowners whose current mortgage interest rate is below 4.5 percent makes up almost 80 percent of those who can lay claim to this equity and 60 percent of it is held by borrowers whose rate is below 4 percent. According to the Mortgage Bankers Association. the average rate on the 30-year fixed today is around 4.8 percent.
Those homeowners who are tapping equity are doing it more through cash-out refinances than HELOCs. Originations for HELOCs are flat, and the amount of equity being withdrawn on HELOCs that are originated is at a two-year low.
Because homeowners are leery of the housing market in the shadow of the 2008 crash, most of them are doing cash-out refinances, even at a higher interest rate. Overall, however, only 1.17 percent of what’s available was tapped in the first quarter of this year, which is the lowest amount in four years.
Why? It may come down to the simple fact that they may not know just how rich they are. “I think the typical American doesn't have that level of awareness, they're not probably studying the numbers,” added Graboske.
The other fact that is likely true is memories of 2008. The pain of the housing crash that happened 10 years ago is still being felt by many. Previous to 2008 borrowers often used their equity like ATMs which is in part what led to millions of borrowers losing their homes to foreclosure, many of whom are just now able to qualify for a mortgage again.
This led to many of today's homeowners who saw their parents lose their homes or were evicted as teenagers. Another factor is that home prices are also rising very quickly. This has led to some markets overheating, with sales slowing even as prices rise. Because prices, historically, follow sales, this is a red flag to many mortgage holders.
Though consumer confidence in the housing market has been quite bullish it is now actually dropping. The net share of Americans who say home prices will go up in the next year fell 3 percent in June compared with May, according to a monthly housing sentiment survey by Fannie Mae.
Doug Duncan, Fannie Mae’s chief economist, said in a recent release, “Tight supply, and lackluster income growth continue to weigh on housing activity, and consumer expectations for home price growth over the next 12 months have moderated. However, consumers expressed increased optimism about the direction of the economy and their personal financial situations over the next 12 months.”
Here’s How to use your Home Equity To Your Financial Advantage
In times of financial struggle its normal to look toward your home's equity as a quick fix. There are certain financial situations that are well suited to using your homes equity and some that aren’t. Let’s take a look at 3 keys to help you use this source of funding to your best advantage.
Some home equity basics can help you begin to evaluate what's best for you. Though home equity may sound complicated all it means is the difference between what your home is currently worth on today's market and how much money you currently owe on it. Let's take a look a simple example. If a home is worth $200,000 and still carries a $150,000 balance on the mortgage, then the house currently has $50,000 in equity.
Unfortunately with some of the large declines in real estate values in parts of the US, some home equity loans are tougher to get. A homeowner whose credit history is good and has some home equity should be able to use the equity in your home as collateral against a loan that contains two key benefits:
Very low-interest rates. As a general rule, loans like these have interest rates that are normally much lower than things like credit cards or other non-collateral loans.
Big tax breaks from Uncle Sam. When you file your taxes and get money back it lowers the cost of borrowing even more meaning in many cases you can deduct the interest on as much as $100,000 of the debt carried against your home’s equity.
There are basically 2 different ways you can borrow against the equity in your home:
You can receive an instant advance of a single sum of money using a home equity loan. This type of loan will have required payments set up over a fixed period of time at a fixed rate of interest.
A home equity line of credit is like an open-ended loan similar to a credit card which you can borrow money as you need it, up to the lender approved amount. Often the rates are variable and your payments will change because interest rate changes will vary as your balance changes.
It really depends on your personal needs as to which one will be best for you. A lump sum home equity loan will offer you the security of a fixed rate and fixed payment but you have to take all the money at once. A home equity line of credit offers more future flexibility and if not needed the money will be at the ready without having to make payments until such time as you need it.
In either case, you must use this money wisely. Lenders love home equity interest rates because of the fact that you are putting up your family's home as collateral. But the truth is you can really put your well being at risk if you overspend and cannot make the payments. It stands to reason then that your first thoughts should be on WHY you need the money not on how much you can borrow.
It's important to remember that any debt you take on should be used to improve your financial position or to make a necessary purchase of something that will have lasting value - at least lasting as long as the term to pay back the loan. Using a home equity loan for a new wardrobe, a fancy getaway, lavish gifts, or spur of the moment purchases is not a wise use of this money. It doesn't matter how low your after-tax cost of borrowing is.
Let’s take a look at some wise uses of home equity debt:
Consolidation of current high-interest debt. Bundling multiple balances of different loans into one payment using a home equity loan, you can dramatically lower your interest rates across the board as well as making paying your bills much simpler. However, there is a caveat: You MUST have the discipline to make debt consolidation work. You can end up in considerably worse shape if you turn around and run up all your balances again.
Make improvements to your home. Before taking on any major upgrades to your home you need to think about things like how long you expect to stay in this home and reap the benefits of your investment. In all likelihood, this type of investment would make your home more valuable increasing your equity down the road but keep in mind that a failing market could take all of that away overnight.
Education costs:
If college is on the horizon for you or your children then a home equity loan can offer a better alternative than many other sources of funding can. However, take time to look at all the federally sponsored options available today. Be sure to keep in mind you can deduct up to $2,500 in interest from student loans, depending of course on your income. Just be careful to balance that debt against your own needs for financial security or retirement.
AUTHOR BIO
Will Foster | First State Bank Mortgage Senior Loan Officer
I became a mortgage lender in 2010, right after the "bubble" popped, and the mortgage industry underwent an incredible transformation. This has given me a unique advantage in the fact that I have never known anything other than the highly-regulated world we now live in.
Throughout my years of experience, my primary goal has been to keep up with the constant changes in the industry so I can help my clients investigate all of their options and maximize savings. In addition, because I specialize in Conventional, FHA, USDA, Jumbo, portfolio, and VA refinances and purchases, I can help a wider variety of individuals, families, and investors identify and secure the right loan to best suit their future interests.
The mortgage process can be a little confusing and even overwhelming these days with all of the regulations. I guide my clients through the process from start to finish, and I try and make it as painless and hassle-free as possible.