Rising home values are making homeowners south of the border richer, a lot richer. Whether they choose to use it or not, the amount of equity today's homeowners are able to tap is at the highest level on record, according to a new report.
Investment firm Black Knight says, all through 2017, the amount of money a borrower could take out of a home while still leaving 20% in it, which is what most lenders require, rose by $735 billion U.S., the largest annual increase by dollar value on record. The brought the collective amount of so-called "tappable" equity to $5.4 trillion, which is 10% more than at the pre-recession peak in 2005.
Unlike during the last peak, homeowners today are far more conservative and lenders are stricter. Last year, even with record equity, homeowners took out only $262 billion via cash-out refinances or home equity lines of credit, or HELOCs. While that is another post-recession peak in dollars, it is less than 1.25% of all available equity, a four-year low.
More than half of borrowers who withdrew equity last year used cash-out refinances, thanks to near record-low interest rates. That is likely to change this year, given higher rates. Three-quarters of borrowers today with tappable equity have interest rates lower than the current rate, so will likely used second loans, HELOCs, instead.
As with everything in real estate, the amount of homeowner equity varies dramatically depending on location. It is highly concentrated in the high-priced state of California. In fact, 39% of the nation's total tappable equity is there. Seattle and Las Vegas, which have seen huge home price jumps, have seen big equity increases as well.
While borrowers tend to use home equity for a variety of purposes, including paying down debt and education expenses, the primary use is for home improvement. This is more true now than ever, as the critical shortage of homes for sale has more owners staying in their houses longer and choosing to renovate rather than upgrade to another home. The average homeowner now stays in their home for 10 years, an all-time high, according to the National Association of Realtors.
