Home equity is near an all-time high. It may be difficult to access due to the high interest rate – NBC Chicago

• Homeowners with mortgages have $17 trillion in home equity, near an all-time high, according to CoreLogic.
• Access to property wealth is currently difficult due to high interest rates, financial advisers said.
• Options for homeowners include a home equity line of credit, a reverse mortgage, and selling their home.

Home equity is near its all-time high. But financial advisors say it can be difficult to access due to high interest rates.

Total home equity for U.S. mortgage holders reached more than $17 trillion in the first quarter of 2024, just shy of the record set in the third quarter of 2023, according to new data from CoreLogic.

Average equity per borrower increased by $28,000 – to a total of about $305,000 – from the previous year, according to CoreLogic. That's an increase of almost 70% from $182,000 before the Covid-19 pandemic, said chief economist Selma Hepp.

About 60% of homeowners have a mortgage. Their net worth is equal to the value of the home minus outstanding debt. Total Home Equity for U.S. Homeowners with and without mortgage, totals 34 trillion dollars.

The rise in home equity is largely due to a rise in real estate prices, Hepp said.

Many people also refinanced their mortgages earlier in the pandemic, when interest rates were “really, really low,” perhaps allowing them to pay off their debt faster, she said.

“For people who owned their home at least four or five years ago, on paper they feel fat and happy,” said Lee Baker, founder, owner and president of Apex Financial Services in Atlanta.

Baker, a certified financial planner and CNBC advisory board member, and other financial advisors, however, said accessing that wealth is complicated by high borrowing costs.

“Some options that might have been attractive two years ago are not attractive now because interest rates have increased so much,” said CFP Kamila Elliott, co-founder of Collective Wealth Partners and also an advisory board member. from CNBC.

That said, there may be cases in which it makes sense, advisers said. Here are some options.

Home Equity Line of Credit

A home equity line of credit, or HELOC, is typically the most common way to tap into home wealth, Hepp said.

A HELOC allows homeowners to borrow against the equity in their home, usually for a set period of time. Borrowers pay interest on the unpaid balance.

The average HELOC has an interest rate of 9.2%, according to June 6 Bankrate data. Rates are variable, meaning they can change unlike fixed rate debt. (Homeowners can also consider a home equity loan, which typically has fixed rates.)

For comparison, rates for a 30-year fixed-rate mortgage are around 7 percent, according to Freddie Mac.

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Although HELOC rates are high compared to a traditional mortgage, they are much lower than credit card rates, Elliott said. Credit card holders with an account balance have an average interest rate of about 23 percent, according to Federal Reserve data.

Borrowers can typically leverage up to 85% of their home's value (minus outstanding debt), according to Bank of America.

Homeowners can leverage a HELOC to pay off high-interest credit card debt, Elliott said. However, they need to have a “very focused plan” to pay off the HELOC as quickly as possible, ideally within a year or two, she added.

In other words, don't just make the minimum monthly payment on your debt — which might be tempting because those minimum payments would likely be lower than a credit card, she said.

Likewise, homeowners who need to make repairs (or improvements) can use a HELOC instead of using a credit card, Elliott explained. This may have an added benefit: Those who itemize their taxes may be able to deduct their loan interest on their tax return, she added.

Reverse Mortgage

A reverse mortgage is a way for older Americans to tap into the equity they have in their homes.

Like a HELOC, a reverse mortgage is a loan against the equity in your home. However, borrowers do not repay the loan every month: the balance increases over time with accrued interest and fees.

Advisors say a reverse mortgage is likely the best solution for people who have a large portion of their wealth tied up in their home.

“If you were late to get the retirement ball rolling [savings]it’s another potential source of retirement income,” Baker said.

A home equity conversion mortgage (HECM) is the most common type of reverse mortgage, according to the Consumer Financial Protection Bureau. It is accessible to owners aged 62 and over.

A reverse mortgage is available as a lump sum, line of credit, or monthly payment. This is a non-recourse loan: If you take steps like paying property taxes and maintenance fees and using the home as your primary residence, you can stay in the home as long as you want.

Borrowers can typically tap up to 60% of the equity in their home.

Homeowners or their heirs will eventually have to repay the loan, usually by selling the home, according to the CFPB.

Although reverse mortgages generally leave heirs with less inheritance, this should not necessarily be considered a financial loss to them: in the absence of a reverse mortgage, these heirs would have paid out of pocket to help with the subsidize the borrower's retirement income, Elliott said. .

Sell ​​your house

Historically, the biggest benefit of having home equity was accumulating more money to invest in a future home, Hepp said.

“That’s historically how people were able to move up the housing ladder,” she said.

But homeowners with a low, fixed-rate mortgage may feel locked into their current home because of the relatively high rates that would accompany a new loan for a new home.

Relocating and downsizing remains an option, but “those math doesn’t really work in their favor,” Baker said.

“Not only did their house go up in value, but everything else in the surrounding area went up as well,” he added. “If you try to come up with something new, there’s only so much you can do with it.”

Withdrawal refi

A cash-out refinance is another option, but should be considered more of a last resort, Elliott said.

“I don’t know anyone right now who is recommending a cash-out refi,” she said.

A cash-out refi replaces your existing mortgage with a new, larger one. The borrower would pocket the difference as a lump sum.

To give a simple example: let's say a borrower has a home worth $500,000 and an outstanding mortgage of $300,000. They could refinance a $400,000 mortgage and receive the $100,000 difference in cash.

Of course, they would likely refinance at a higher interest rate, meaning their monthly payments would likely be much higher than their existing mortgage, Elliott said.

“You really have to crunch the numbers,” Baker said of the options available to owners. “Because you're cluttering the roof over your head. And that can be a precarious situation.”